What is Repo Linked Lending Rate (RLLR) Meaning?

What is Repo Linked Lending Rate (RLLR) Meaning?

From 1st October 2019 onwards, all the new floating retail loans interest rates like personal loans, education loans, car loans, home loans etc., sanctioned by the financial institutions got linked to the external benchmark wherein one of the benchmarks is the central bank's repo rate. Each and every bank has its own RLLR (RLLR full form – Repo Linked Lending Rate), which keeps differing every time the RBI revises its repo rate. Repo rate is the rate at which the financial institutions borrow from RBI. Central banks review the repo rates bi-monthly through their MPC or Monetary Policy Committee meeting.

What is RLLR Full Form & RLLR Meaning?

Wondering what is RLLR meaning? As suggested by the name, RLLR full form is Repo Linked Lending Rate, which is linked with RBI's repo rate plus the bank's margin or spread. 

RLLR = RBI’s repo rate + Margin/spread charged by the bank

Banks may address RLLR by other terms, even called EBLR (External Benchmark Linked Rate), RBLR (Revised Repo Rate Lending Rate) etc.

The margin or spread that the bank charges stays the same for all the loan applicants. However, based on the RBI circular, banks have the permission to charge their borrowers risk premium. The risk premium that the banks charge to the borrower is based on their risk analysis considering a particular applicant and differs from one applicant to another. 

What is MCLR?

MCLR, also known as Marginal Cost of Funds Lending Rate, refers to a tenor based internal benchmark system that decides the rates of the loans. MCLR is the minimum rate used by banks to extend credit options to their customers. The introduction of this rate was done to enhance average revenue yielded by the banks through loan extension depending on the marginal cost of funds. It is calculated internally by the financial institutions based on 4 crucial components – CRR or Cash Reserve Ratio, Marginal Cost of Funds, Operating Costs and Tenure Premium. 

Basis the above components, the formula for one year MCLR = Rate of interest offered by the bank on one-year term deposit + tenure premium + CRR + operating costs. 

The banks set the MCLR for various tenures like overnight, one month, 3 months, 6 months etc. Note that the final MCLR based rate for a loan is determined by banks after they have considered the spread to MCLR based on the applicant's credit profile, loan tenure, loan amount etc. 

MCLR vs RLLR

* MCLR is banks' internal benchmark where their own funds' cost decides their MCLR. However, RLLR is an external benchmark, wherein the bank's own funds cost does not have any impact directly when the repo rate rises or falls. RBI, in turn, is dependent on the repo rate. On every revision of RBI's repo rate, banks' RLLR gets affected. Repo rate cut lowers banks RLLR & vice versa.

* MCLR's reset period is usually 12 months, whereas few lenders reset it every 6 months. Based on the reset period, the borrower's loan rate and their EMI have been revised accordingly. It gives time lag to the MCLR linked loans. But in the case of the RLLR linked loans, the reset period of rates is at least 3 months.

* In the situation of MCLR based loans, lenders are permitted to charge spread, margin or mark up. For instance, if the MCLR of a bank equals 7 %, then it might lend at 8 % after factoring in 100 basis points of mark upcharge. In the case of RLLR, the spread is based on the risk group of the applicants and the loan amount opted for.

Why is RLLR replacing MCLR?

RLLR based loans were introduced by RBI to make sure that the loan applicants have accessibility to a completely transparent benchmark. Quicker rate cuts transmission plays a major role among many applicants to opt for the RLLR option instead of MCLR. 

Repo rate linked loans are not just available to the new applicants but also the existing loan borrowers. That is, if you are under the MCLR benchmark, you can opt to switch to RLLR. RBI has instructed the lenders to permit their borrowers to transition from MCLR to RLLR without incurring any additional margin or spread. But note that they might be charged with administrative fees based on the financial institution’s policy. 

While the repo rate appears to be a good option for the existing borrowers, note that the final rate will be at the repo rate plus the margin or spread charged by the lenders. This means lenders may have an RLLR of 8%, wherein the repo rate is 4%, and their spread is 4%. Financial institutions are completely free to set their spread at differing margins for their borrowers based on their credit risk analysis.

How much do you expect to save on RLLR-linked loans?

To know how much you can save on your RLLR based loans compared to the MCLR linked loans, let us take an example of an IDBI car loan. 

Car loan amount: Rs 5 lakh

Loan tenure: 5 years

IDBI MCLR 1 year: 7.65% and RLLR is 6.90%

Interest rate range for MCLR based car loan: 9.20% - 9.80% 

Interest rate range for RLLR based car loan: 7.50% - 8.10%

Based on the above example, the burden of interest will be lower in the case of RLLR loans as compared to MCLR linked loans. Monthly instalments, too, would be relatively less for RLLR based loans. Thus, the amount that you save by opting for the RLLR linked loans can be get used for investment purposes or to meet any other financial needs. 

FAQs

1) What is RLLR?

RLLR refers to an external benchmark. RLLR full form is Repo Linked Lending Rate. RLLR based loan interest rates get calculated on factoring in RBI's repo rate plus bank's margin plus borrower's credit risk spread. 

2) What is better, MCLR or RLLR?

RLLR linked loans are better because of 2 major reasons: 

* In the case of RLLR based loans, the interest burden on borrowers is lower than the MCLR based loans.

* Advantage of repo rate cut by the RBI is transferred immediately to the borrowers.

3) What is the RLLR of Canara Bank?

RLLR for Canara Bank currently is 6.90%.

4) What is RLLR in SBI?

EBLR for SBI currently is 6.65%. 

5) What is PNB RLLR?

RLLR for PNB currently is 6.80%