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The Reserve Bank of India (RBI) introduced the Marginal Borrowing Rate (MCLR) on April 1, 2016, to offset the base rate, which was the benchmark rate for everyone at the time. of commercial banks. However, the banks’ delay in passing on the benefits of low repurchase rates to clients under the MCLR program prompted the RBI to come up with an alternative plan: the introduction of the external benchmark rate. According to RBI guidelines, as of October 1, 2019, all banks have linked retail customer loans to the RBI base rate or other benchmark market rate published by Financial Benchmarks India Private Limited (FBIL).
The fact that the way banks rate credit has fundamentally changed, it is important that you understand all aspects. This article explains how the current Reverse Repurchase Loan Rate (RLLR) differs from the previous Internal Interest Rate Scheme (MCLR).
The MCLR is an internal benchmark that is tied to the term and determines the interest rate on loans to individuals as B. Mortgage Loan Determination. This is the minimum rate at which a financial institution can lend to its clients. The rate was introduced to increase the average income of financial institutions by granting credit according to their marginal cost of financing. This is in direct contrast to the base rate, which takes into account the total cost of borrowing from credit institutions. The MCLR is calculated internally based on four elements: marginal costs of funds, cash reserve ratio (CRR), occupancy premium, and operating costs.
Based on the above, a 1-year MCLR formula for a bank = interest rate offered by the bank for a 1-year time deposit + CRR + term premium + operating costs.
Therefore, banks set MCLRs for different maturities: day-to-day, 1 month, 3 months, and 6 months. However, the bank determines the final interest rate on the MCLR-related loan after adding the margin to the MCLR based on your credit profile, loan amount, term, etc.
RLLR is an external reference that uses the RBI repurchase rate used by commercial banks to calculate the interest rate on retail loans. If the repurchase rate is reduced by 35 basis points from 5.75% to 5.40%, the RLLR of all banks with the reverse repurchase rate as the external reference is reduced by 35 basis points. The RLLRs for all banks included the current buy back rate, occupancy premium, and the margin or predefined margin that was maintained for adequate revenue generation.
The following sections explain the main differences between MCLR and RLLR to help you better understand the new RLLR regimen.
Referral link: MCLR and RLLR follow different referral systems. The MCLR is an internal benchmark, which means that it is set by banks taking into account their own refinancing costs. It is not just the buyback rate that determines the lending rate. Factors such as g-sec rates, economic deposits, the liquidity of the banking system, etc., affect the financing costs of banks. Therefore, a decrease in the repurchase rate does not lead to a similar decrease in the banks’ MCLR.
The RLLR, on the other hand, is an external benchmark that is tied to the buyback rate. A change in the repurchase rate does not affect the bank’s cost of capital. Therefore, every time the RBI changes the repurchase rate, the bank’s RLLR changes, which affects the mortgage rate pegged to the RLLR. Each bank has its own RLLR. In addition, the external benchmark ensures standardization and more transparency, since borrowers do not have to rely on banks to inform them of changes in interest rates. You can follow the landmark yourself.
Readjustment Period: For MCLR-related home loans, the grace period is typically 6 or 12 months. That means banks would review their MCLR every 6 to 12 months. A change in the MCLR would change mortgage rates and, consequently, mortgage IMEs accordingly. Such a long reinstatement period will result in a delay on MCLR-related loans.
In the case of RLLR, the restart period is 3 months. This means that your loan rate linked to the RLLR would help to review the IMEs every 3 months. In this way, borrowers could benefit from the lower buyback rate. However, if the repurchase rate increases, the lending rates will also increase rapidly.
Volatility: The volatility or frequency with which variable loan rates change can be determined depending on whether they are tied to the RLLR or the MCLR. In accordance with RBI guidelines, interest rates pegged to the RLLR are subject to a review every 3 months. In other words, any change in the repurchase rate leads to a change in the RLLR of commercial banks every 3 months. MCLR loan rates, on the other hand, are verified every 6 to 12 months. Therefore, the volatility of the interest rates of the loans linked to the RLLR is greater than the volatility under the MCLR regime.
