SBI to link retail, MSME loans to repo rate

State Bank of India (SBI) will adopt repo rate as the external benchmark for all floating rate loans for micro, small and medium enterprises (MSMEs), housing and retail from October 1, 2019.

The bank has extended the scheme to medium enterprises also to boost lending to the MSME sector as a whole. SBI had introduced floating rate home loans effective July 1, 2019. "A few modifications have been made in the scheme effective October 1, 2019, to comply with the latest regulatory guidelines," the bank said in a statement.

After disbursing about Rs 2,000 crore worth of loans under its repo linked home loans, SBI had recalled the scheme, saying it was not affordable to open it to customers without an income criteria. Those who have taken the loans under this scheme will continue at the same rates of interest. In July SBI was the first bank to launch a repo linked home loan for borrowers with an annual income of Rs six lakh and above.

However, earlier this month, Reserve Bank of India came out with elaborate guidelines on the need for banks to link all their new retail loans and MSME loans to the external benchmark. However, SBI's report linked home loans were only open to people with a certain income level. Ratings agency Moody's last week said that repo linked loan products are credit negative for Indian banks and it will limit their flexibility in managing interest rate risk.

Following SBI's footsteps, almost all banks had launched repo rate linked home loan rate. With the launch of this product the loan rates will drop, pushing down deposit rates too. Retail deposit rates, an important source of money for small savers, will be slashed as banks look to keep their margins comfortable.

RBI said that the anchor rate to which all the loans are linked should be transparently determined and banks can impose premiums over this to recoup their costs. Over and above the floor rate, banks build tenor premium and risk premium. The central bank says the anchor rate should be transparently determined. The option that RBI gave the banks was repo rate, three-month and six-month Treasury bills.

State Bank of India