Canara Bank and Corporation Bank introduce repo-linked loan products

The Reserve Bank of India (RBI) has made it mandatory for banks to link their retail and MSME loans to external interest rate benchmarks effective October 1 for faster transmission of rate cut to borrowers.

1st Oct 2019
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Rushing to meet the Reserve Bank of India (RBI) deadline of October 1, many public sector lenders such as Canara Bank and Corporation Bank announced launch of repo rate-linked lending rate for faster transmission of interest rate cut to borrowers.


In early September 2019, the Reserve Bank of India (RBI) made it mandatory for banks to link their retail and MSME loans to external interest rate benchmarks effective October 1 for faster transmission of rate cut to borrowers.


Several banks, including State Bank of India, have already announced to link their loan products with external benchmarks from October.


With banks launching this product, rates for home, car, and personal loans will come down.


However, Moody's Investors Service had said the move is credit negative to the lenders as it would limit their flexibility in managing risks.


"This is credit negative for India's banks as it will limit their flexibility in managing interest rate risk," Moody's said in a statement.


Canara Bank in a regulatory filing said Repo Rate Linked Lending Rate (RLLR) of the bank for retail loans and Micro, Small, and Medium Enterprises (MSME) is 8.30 per cent with effect from October 1.


It is widely expected that RBI is going to cut its benchmark lending rate in its bi-monthly monetary policy review on October 4.


With this reduction, the rate are going to further go down.


Without informing the rate, Corporation Bank said it has decided to link all new floating rate loans to retail, personal segment and Micro & Small Enterprises (MSE) to Reserve Bank of India's policy repo rate.


"Our Bank has decided to Repo Linked Lending Rate (RLLR) to Repo Rate + Mark Up that is (5.40 per cent + 2.85 per cent = 8.25 per cent) with effect from October 1, until further review," Indian Overseas Bank said.


As a gesture to small borrowers, the bank has decided to charge Mudra loans up to Rs 50,000 at an interest rate of 8.25 per cent, passing a benefit of 0.25 per cent to these borrowers.


Further, the bank announced its decision to link interest rate on savings accounts with balance of Rs 25 lakh and above. However, interest rate to be paid for such accounts is presently pegged at four per cent level offered by the bank.


In a bid to improve transparency, the RBI directed all banks to link loans to repo rate from October 1. In 2019, the RBI reduced the repo or short-term lending rate by 110 basis points (bps), but the banks have reportedly passed on only up to 40 bps to borrowers.



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