Repo Linked Lending Rate (RLLR) - The Complete Guide

The Reserve Bank of India (RBI) always tries to maintain a benchmark lending rate regime for banks to follow. The RBI does this to

• Encourage transparency in the bank’s system of charging interests on loans from retail borrowers.
• Keep loan interest rates under control as per the prevailing economic conditions of a nation.

This is important as even the slight fluctuations in the loan interest rates can affect borrowers. Especially, EMIs on Home loans can be affected due to change in the RBI-controlled lending rate.The RBI introduced the Base Lending Rate (BLR) system in 2010 and then moved to the Marginal Cost of Funds-Based Lending Rate ( MCLR ) system in 2016. It has now introduced the Repo Linked Lending Rate , or RLLR, in October 2019.Let us find out what is RLLR and why the RBI is shifting from the older system to the new RLLR.

• Repo Rate We borrow money from commercial banks by taking loans at a certain interest rate. Similarly, banks borrow money from the RBI at a certain interest rate. The repo rate is the rate of interest at which the commercial banks borrow money from RBI against government securities. The repo rate can be reviewed once in two months, and the lending rates of banks are required to be reset at least once in three years.
• Base Rate It is a benchmark below which lenders are not allowed to lend money to their customers. However, banks can perform lending above this base rate. The benchmark or reference rate can be internal or external.While lenders set the internal benchmark rate under the guidelines set by RBI, the external benchmark lending rate can be either linked to the RBI repo rate or any benchmark interest rate published by the Financial Benchmarks India Private Limited.
• Spread/Margin A bank charges a certain amount as interest from the borrower and pays a certain amount as interest to the depositor. The difference between these two interest rates is called bank spread or margin.
  In home loans, the homeowner has to pay this spread to the bank on top of the repo rate while taking a loan.

Banks offer loans at a certain rate of interest. If this interest rate is linked to the repo rate, it is called r epo linked lending rate (RLLR). As per an October 2019 circular from RBI, banks must link their retail loans to external benchmark lending rates (E-BLR). As a result, most banks have adopted the repo rate as their benchmark.

Since banks borrow money from the RBI at the repo rate, any change in the repo rate affects the lending rate of banks.Therefore, the interest rates for a person will increase or decrease as per the changes in repo rate if he chooses an RLLR home loan.

The marginal costs of the funds-based lending rate (MCLR) is an internal benchmark that determines the interest rate on loans based on the marginal cost of funds, loan tenure premium, operating costs, and the Cash Reserve Ratio (CRR).MCLR linked interest rates get affected whenever the repo rate is revised by the RBI. Banks can increase or decrease the MCLR depending upon the changes in the repo rate.Before the introduction of MCLR in 2016, banks did not use to consider the repo rate for base calculations. They relied on CASA (Current accounts and Savings accounts) for calculating the lending rates. MCLR was the first attempt to link the repo rate to the loan interest rates closely.However, it has been observed that borrowers are often late in receiving the benefits of repo rate cuts in the form of lower interest due to time lag in implementing these changes. As a result, the entire benefit of repo rate cuts might not pass on to a borrower in the MCLR linked interest rate format.

The MCLR linked interest rates of six months or one year are used by banks to calculate their home loan interest rates. Therefore, even if the RBI cuts the repo rate for, say, 3 to 4 months, the borrower's interest rates remain unchanged.On the other hand, the rate revision is quicker in RLLR as it is an EBLR-based system. Banks need to reset their loan rates at least once every three months as per the requirement of the EBLR system.While some banks adjust their interest rates as soon as the RBI changes the repo rate, other banks update their interest rates every month or at frequent intervals under this system. Therefore, home loan borrowers can immediately get the benefits of repo rate cuts.

It is worth noting that existing MCLR home loan borrowers can shift to RLLR home loans without any extra cost. However, there can be some administrative charges.

The RBI has been keeping the repo rate untouched for a while. It can be assumed as a good sign as it shows the Indian government’s intention of creating a positive and hopeful environment for prospective homebuyers who are looking forward to applying for RLLR home loans. The lenders are also likely to retain the interest rates until the next change in the repo rate.

The RLLR home loan is designed to deliver the maximum benefit to the retail borrower. However, it can have a flip side as well.If the RBI decides to increase the repo rate instead of cutting it, you might end up paying higher EMIs. Additionally, considering the fact that most banks reset their RLLR loan interest rates once in three months, volatility.For example, if RBI decides to increase the repo rate by just 10 basis points, then your RLLR interest rate of 4 per cent will become 4.10. Adding bank spread into this can result in an actual interest rate of around 7.3 per cent.

Interest rates can also depend upon various factors such as loan amount, CIBIL score, loan repayment tenure, previous loan burden, income stability, etc.A bank can offer special lending rates depending upon the customer and his relationship with the bank. These special rates can be higher or lower than the standard interest rates on offer.

The existing borrowers who have to pay EMI for a long tenure can consider moving from the earlier lending rate systems like BLR or MCLR to the RLLR because it is a more transparent method. Furthermore, borrowers can expect a lower burden of EMI payment as the RBI cuts repo rates.However, if you are nearing the end of your loan repayment tenure, then it is advised not to switch lending rates as you may end up paying unnecessary expenses.Moreover, you should consider your credit score before deciding to switch. A credit score of 750 or higher is considered a good credit score.Banks prefer a borrower with a good credit score and may forego the margin cost which may result in lower interest rates and EMI. On the contrary, you might have to pay higher interest rates if your credit score is poor.Fortunately, maintaining a good credit score is not a difficult task. All you need is to follow a few easy steps.

• You only need to pay your EMIs and credit card dues on time.
• Refrain from using your credit card to its full limit.
• Do not apply for multiple loan applications quickly as it shows desperation for a loan.

While it is still early to gauge the long term impact of RLLR on the Indian lending scenario, it seems to be the right way forward to greater transparency and focus on the borrower’s interest. The borrowers, on their part, can keep themselves updated on the latest happenings in this sector so that they can avail of the maximum benefit from this system.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.