RBI has asked banks to link their lending interest rates to any of the four external benchmarks:
- RBI’s repo rate
- Government of India 3-months Treasury bill yield published by Financial Benchmarks India Pvt. Ltd. (FBIL)
- Government of India 6-months Treasury bill yield published by FBIL
- Any other benchmark market interest rate published by FBIL
Most banks have opted to link the interest rate on loans to RBI’s repo rate. A bank’s interest rate linked to the repo rate is called Repo Rate Linked Lending Rate (RLLR). The bank arrives at its RLLR by adding a spread or margin to the repo rate.
RLLR = Repo rate + Margin or spread
Currently, repo rate is at 5.15 per cent.
Apart from the margin,
banks’ can also charge risk premium from the borrowers on the home loan taken
by them. Though spread will remain the same for all home loan borrowers of a
particular bank, the risk premium will vary. Usually, it is seen that banks
charge higher interest rates on loans to self-employed customers compared to
salaried borrowers.
Top 5 banks offering lowest
interest rate on home loans to salaried individuals
| BANK | RLLR | Min. Int. Rate** | Max. Int. Rate** |
| SBI Term loan | 7.05 | 7.20 | 7.55 |
| Bank of India | 7.25 | 7.25 | 7.55 |
| Central bank of India | 7.25 | 7.25 | 7.35 |
| SBI Max Gain | 7.05 | 7.45 | 7.80 |
| Indian Bank | 7.20 | 7.55 | 7.85 |
*SBI as processing fees charges a
premium of 10 bps for loans up to Rs 30 lakh if LTV ratio is >80% &
<=90%.
*Bank of India charges 0.25
% of loan; Min. Rs. 1500/- Max. Rs. 20000/-
*Central Bank of India
charges 0.50% subject to maximum Rs.20,000/-
*Indian Bank charges 0.230%
on loan amount with a max. of Rs.20470/-
** Sorted on minimum
interest rate charged by the bank after adding risk premium
Top 5 banks offering lowest interest rate on home loans to self-employed
| BANK | RLLR | Min. Int. Rate** | Max. Int. Rate** |
| Bank of India | 7.25 | 7.25 | 8.15 |
| Central bank of India | 7.25 | 7.25 | 7.35 |
| SBI Term loan | 7.05 | 7.35 | 7.70 |
| Indian Bank | 7.20 | 7.60 | 7.90 |
| SBI Max Gain | 7.05 | 7.60 | 7.95 |
*SBI as processing fees charges a premium of 10 bps for loans up to Rs 30 lakh if LTV ratio is >80% & <=90%.
*Bank of India charges 0.25 % of loan; Min. Rs. 1500/- Max. Rs. 20000/-
*Central Bank of India charges 0.50% subject to maximum Rs.20,000/-
*Indian Bank charges 0.230% on loan amount with a max. of Rs.20470/-
** Sorted on minimum interest rate charged by the bank after adding risk premium
All data sourced from Economic Times Intelligence ..
Factors that will impact changes
in your home loan EMI
There are two factors that can impact the amount
of equated monthly instalment (EMI): Changes in the external benchmark rate and
risk assessment done by your bank.
RBI, in its circular, has asked banks to reset
the interest rates linked to an external benchmark at least once every three
months. Therefore, in case of any change in the external benchmark, for
instance, repo rate in the above table, then banks will also have to change the
interest rate they are charging you for the loan taken.
Remember as per the RBI circular, if your credit risk undergoes any major change during the tenure of the loan, then the bank can revise the risk premium charged from you.
Why RBI took this decision
The central bank has directed banks to link the interest rate on retail and MSME loans to an external benchmark rate in order to provide greater transparency and faster transmission of changes in the key policy rates. Under the previous marginal cost-based lending rate (MCLR) regime, home loan borrowers often complained about banks quickly raising interest rates when RBI raised key policy rates but rates were not cut in the same rigour when RBI reduced the repo rate.