Impact of RBI rate cut on Bank loans

Monetary Policy Committee of Reserve Bank has recently reduced the repo rate by 25 basis points to 5.15 per cent from 5.40 per cent.

Hyderabad:The Reserve Bank has recently cut interest rates. The interest rates on loans taken by customers will also fall. However, interest rates on all loans are not reduced.

There are two types of loans offered by banks. One of those is fixed interest rate loans. The second one is floating interest rate loans. The Reserve Bank's decision has no impact on fixed interest rate loans. Only the floating interest type has a rate reduction effect.

How do banks decide interest rates ?

Whenever the Reserve Bank lowers interest rates, it requests banks to transfer that money to consumers. The decision will be taken by the officials of the respective banks. There was no provision for banks to cut interest rates. However, from October 1, banks have been directed to provide loans to retail and small-scale enterprises through an external benchmark.

Treasury Bill Rate, Certificate of Deposit Rate and Repo Rate are called external benchmarks. In relative to these rates, banks will fix interest rates. Through this, the interest rate reduction benefit is transferred to the customers quickly and automatically.

Is it automatic?

Each bank has core banking teams or back-end teams. Banks handle all transactions digitally. There will be servers for bank functionalities. Banks will change the interest rates on the bank's central server so that Interest rates for consumers are reduced automatically.

Customers do not need to contact the bank to take advantage of the interest rate reduction. In case of any doubt in interest rates, they can contact bank officials.