Basics of RLLR Explained

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.

How does it work?

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.

Frequently Asked Questions

Yes, in case of RLLR loans, your monthly installments will be higher than those of MCLR. However, during the latter half of loan repayment your installments will witness substantial decline.

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 27thMarch, 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.

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.

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.

The most crucial benefits that consumers will enjoy by opting for RLLR linked loans have been listed below:
1. Substantial difference in the overall interest payable even at the same interest rate with MCLR loans.
2. Immediate and complete transmission of rate cut benefits offered by the RBI from time to time.
3. In most cases, the MCLR rate will be higher than the RLLR rate because of the reduced discretion from banks, NBFCs, and other financial institutions.
4. Significantly lower installments in the latter part of loan repayment.