RBI repo rate alert! Changes effected that home and other loan takers should know about

RBI has effected another rate cut in India's repo rate. This can be quite exciting for home loan, auto loan and personal loan takers. Now, the policy repo rate stands at 6% and it is seen to boost banks as their borrowing cost becomes even more cheaper. When repo rate is low, this should ideally mean low-cost loans in general. Every time RBI repo rate is cut, banks are expected to lower the  interest rates they charge their home, auto, personal loan takers. However, RBI has listed out a host of other changes too, which will have an impact on borrowing and hence interest rates on loans. Here’s a list of the changes RBI made.

1. Liquidity Coverage Ratio (LCR), Liquidity Risk Monitoring Tools and LCR Disclosure Standards!

With a view to move further towards harmonisation of the effective liquidity requirements of banks with the LCR, it has been decided to permit banks to reckon an additional 2.0 percent of Government securities within the mandatory SLR requirement, as FALLCR for the purpose of computing LCR, in a phased manner.

Presently, the assets allowed as Level 1 High Quality Liquid Assets (HQLAs) for the purpose of computing the LCR of banks, inter alia, stands at 2 per cent of the bank's NDTL] and Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) at 13 per cent of the bank's NDTL.

2. Committee on the Development of Housing Finance Securitisation Market!

RBI said, “Globally, residential and commercial mortgages are supported by well-lubricated securitisation markets whereby mortgage originators package portfolios of mortgages and resell them in capital markets as mortgage-backed securities or covered bonds.”

Thereby, in view of the benefits brought in by the standardisation of asset securitisation practices as also their role in enabling superior management of credit and liquidity risks as alluded to before, the RBI has decided to constitute a Committee that will assess the state of housing finance securitisation markets in India.

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The committee will study  best international practices as well as lessons learnt from the global financial crisis; and propose measures to further develop these markets in India by identifying critical steps required such as, inter alia, definition of conforming mortgages, mortgage documentation standards, digital registry for ease of due diligence and verification by investors, avenues for trading in securitised assets, etc. 

3. Issue of Instructions on an External Benchmark!

RBI  has decided to hold further consultations with stakeholders and work out an effective mechanism for transmission of rates. 

This was taken into account the feedback received during discussions held with stakeholders on issues such as (i) management of interest rate risk by banks from fixed interest rate linked liabilities against floating interest rate linked assets and the related difficulties, and (ii) the lead time required for IT system upgradation. 

Earlier, RBI proposed that all new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans to Micro and Small Enterprises extended by banks from April 1, 2019 shall be benchmarked to the external benchmarks, viz., the RBI Repo Rate or any other benchmark market interest rate published by the Financial Benchmark India Private Ltd. (FBIL).

It needs to be noted that,  lender derive interest rates on loans like home, personal, vehicle and other products taking into consideration the cost of funds. It needs to be noted that the interest rate banks charge on loans must be higher than the interest rate they pay to depositors. Thereby, lower cost of funds make banks more attractive.