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RLLR stands for Repo Rate Linked Lending Rate. It is evident that the value of RLLR depends on the Repo Rate. What is the repo rate? Well, it is the interest rate at which RBI lends money to banks and other financial institutions.
So, when RLLR is used to determine interest rates, every time RBI’s repo rate is increased or decreased, it would have a direct impact on the loan interest rates and the EMIs paid by borrowers.
Unlike, Marginal Cost of Funds based Lending Rate (MCLR) where financial institutions had substantial leverage to decide loan interest rates, the RLLR would depend more on external benchmarks i.e. Repo Rate.
In MCLR lending, it was often seen that financial institutions took a long time to implement rate cuts. However, the RLLR would lead to reduction of interest rates in minimal time. Also, MCLR based rates weren’t able to provide borrowers the complete benefit of rate cuts but RLLR would ensure complete benefit transmission.
From October 1, 2019the use of RLLR for determination of interest rates on loans offered by Scheduled Commercial Banks has been mandated by the RBI
Apart from RBI’s repo rate, some other factors like LTV, loan amount and the lender’s margin money also influence the effective RLLR of financial institutions.
So, the effective RRLR = Repo rate + spread (margin).
In RLLR loans, borrower makes two separate payments for repaying the principal amount and the interest. The principal is divided by loan duration to calculate the equated monthly principal (EMP) which remains same throughout the loan payment term. However, the interest payments are subject to change and keep decreasing every month i.e. they are highest in the first month and lowest in the last month.
1 What will happen to my EMIs in case the repo rate is hiked or decreased?
When the RBI evaluates repo rates (usually done every two months) all rate cuts will be transmitted directly to the borrowers. So, any increment or decrement in the repo rate will lead to proportionate increase or decrease in your monthly installments. This transmission will take place almost immediately unlike MCLR where rate cut benefits were not transmitted completely to consumers. Also, the time taken for revision in case of MCLR was greater.
For example, after the repo rate cuts on 27th March, 2020, SBI’s RLLR for home loans decreased from 7.4 % to 6.65 %, on April 1, 2020. However, the MCLR to which loans taken before October, 2019 were linked witnessed a lesser reduction to 7.4 % from 7.7 %. Hence, the benefits for consumers are obvious.
2 How will RLLR work for banks and different financial institutions?
Scheduled Commercial Banks, NBFCs and other financial institutions who implement RLLR will have the option of fixing a spread or margin money over the repo rate. However, this margin/spread will be consistent and there would not be any changes to it at any point throughout the loan tenure. So, the effective RLLR for consumers will be repo rate plus the spread charged by banks.
All in all, the discretion of banks and other financial institutions in changing interest rates has been decreased to a great extent after the implementation of RLLR.
3 Why is the total interest in case of RLLR lower than MCLR?
The primary reason that leads to lower total interests for RLLR is the higher installments paid in initial period of repayment. So, you start paying higher installments from the beginning leading to reduction in unpaid principal. Hence, the interest charged by banks and other financial institutions will be on a smaller sum for the remainder of loan duration. Also, separate payments for principal (EMPs) and interest make the bifurcation smoother and consumer friendly.
4 Why are the benefits transmitted to borrowers a lot more quickly in RLLR when compared to MCLR?
Well, since RLLR is an external benchmark for the determination of interest rates, it gets modified in the same quarter in which Repo Rate is revised. So, the rate change is implemented within three months. In case of MCLR, the financial institutions had a lot more discretion and the interest rate revision took anywhere between 6-12 months. Hence, the rate transmission in RLLR is a lot quicker.
5 How will RLLR be better than MCLR?
The most crucial benefits that consumers will enjoy by opting for RLLR linked loans have been listed below: