State Bank of India (SBI) has decided to link its interest rate on savings account with balance above ₹1 lakh and short-term loans to Reserve Bank of India’s (RBI) repo rate.
Repo stands for ‘Repurchasing Option’.It refers to the rate at which commercial banks borrow money from the RBI.It is one of the main tools of RBI to keep inflation under control.The repo rate currently stands at 6.25%.
Earlier,Reserve Bank of India (RBI) had proposed a major change in the way banks price their loans.It had said that banks will now have to link the interest rates charged by them on different categories of loans to the external benchmark like Repo rate or Treasury Bill rate instead of the used internal benchmark like marginal cost of fund based lending rate (MCLR).
MCLR is an internal benchmark rate that depends on various factors such as fixed deposit rates,source of funds and savings rate.The price of loan comprises the MCLR and the spread or the bank’s profit margin.Spread refers to the difference in borrowing rates and lending rates of financial institutions.
The biggest problem with the MCLR system was lack of required transmission of policy rates to the borrowers.The new system of linking interest rate to repo rate is expected to bring in more transparency in fixing rates and faster transmission of rates.