SBI puts repo-linked home loans on hold, to launch revamped product on 1 October

Mumbai: India’s largest lender State Bank of India (SBI) has put on hold its existing repo-linked home loan product as it prepares to launch a new one on 1 October, complying with the direction of the Reserve Bank of India (RBI), according to a person familiar with the development.

Interestingly, SBI was the first bank to launch a repo-linked home loan in June. Then on 4 September, the RBI asked banks to link their lending rates on floating rate loans to retail, personal and micro, small and medium enterprises (MSME) borrowers to an external benchmark from 1 October.

Several banks have already started linking their lending rates to an external benchmark. Among these are public sector lender State Bank of India, Union Bank of India, Central Bank of India, Punjab National Bank and private sector lender Federal Bank.

According to the person, the new product will remove all inconsistencies between the existing one and what the RBI said in its circular. For instance, while to be eligible for the repo rate-linked home loan from SBI, borrowers needed a minimum annual income of ₹6 lakh, the RBI has asked banks to make it available for all borrowers.

“Moreover, the existing product had a clause where interest rates would change at the month end of the RBI changing its repo rate. This needs to be tweaked as the RBI has now asked banks to ensure that rates are reset at least once every three months," he said.

The bank, he said, will allow all existing home loan customers as on 30 September to switch over to the new product. It is currently working on it.

Mint reported on 16 June that in case of repo rate-linked home loans, borrowers need to repay a minimum 3% of the principal loan amount every year in equated monthly installments (EMIs). The maximum loan tenure of the earlier product was 33 years over and above the maximum moratorium of two years permitted for under-construction properties. The total loan tenure cannot exceed 35 years and the bank charged a premium of 20 basis points (bps) above the applicable interest rate if the loan-to-value was greater than 80%.

The RBI has allowed banks to choose between the repo rate, the government's three-month treasury bill yield published by the Financial Benchmarks India Private Ltd (FBIL), the government’s six-month treasury bill yield published by the FBIL, or any other benchmark market interest rate published by the FBIL.

The central bank has mandated various anchor rates—benchmarks based on which lending rates are set—for bank loans since 1994, before which interest rates used to be set by the RBI. According to experts, the primary advantage of an external benchmark over an internal rate is transparency. While certain costs such as business strategy and operating costs were part of the anchor rate under the MCLR regime, the external benchmark ensures all those are part of the spread and not built into the anchor.