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What Is Repo Rate & How Rbi Repo Rate Hikes Will Impact Your Loan EMI?


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Posted on
Jul 02, 2022
Repo Rate

If we need a loan, the first step is to approach a bank or a non-banking financial institution. The bank decides the rate of interest on loans based on our credit score, loan amount, and duration of the business loan

To borrow funds, the bank needs to have adequate reserves available. When the bank is short of funds, it approaches the RBI or the Reserve Bank of India for a loan. The rate at which the RBI lends money to banks is called a repo rate. Find out more about repo rates in the next section. 

What is the Repo Rate?

A form of short-term borrowing, the full form of repo rate is a repurchase agreement or option. In order to secure the loan, banks need to provide securities like government bonds or treasury bills as securities. 

Why is the Repo Rate Important? 

The Repo rate is important for improving the liquidity of banks and controlling inflation. When the government wants to reduce liquidity in the market, they raise the repo rate, which causes banks to pay more interest to the RBI. 

Higher repo rates translate into higher interest rates for a business loan. When the bank has to borrow funds at a higher rate from the RBI, it, in turn, raises the business loan interest rates. On the other hand, when the economy is experiencing poor growth and businesses need investment to start or expand operations, the RBI will lower the business loan interest rate. When the bank gets a loan at a lower rate from the RBI, it passes the savings to the small business loans. This makes such loans cheaper for us. 

The Relation Between the Repo Rate and Loan EMIs

There is a direct correlation between repo rate and EMIs. The higher the repo rate, the higher the EMI and the lower the repo rate, the lower the EMI. For quicker results, we can use an online EMI calculator for a business loan to calculate the EMI by entering details like the amount of the loan, the interest rate, and the repayment period.

The RBI recently increased the repo rate by 50 bps (basis points. 100 basis points = 1 percentage point), and the current repo rate is 4.9%. We also saw a 40-basis-point increase in May 2022. These rate hikes were required so that the RBI could control the high-inflation trends triggered by increasing crude oil prices due to the Russia-Ukraine war. 

How Can We Calculate EMI for Business Loans?

We can easily determine the monthly EMI outgo with free online tools like a business loan EMI calculator. Thanks to the Government of India’s initiatives to introduce concessional interest rates on business loans, women who want to start a business can now enjoy some added benefits.  

There are two components of an EMI for business loans:

  • Principal Repayment
  • Interest (depends on the current interest rate)

Let us understand how EMIs work with an example. 

Amount of business loan: Rs. 20,00,000

Interest rate: 12% per annum

Loan tenure: 20 years 

When we enter this data in the online business loan EMI calculator, our monthly instalment would be Rs. 22,022. The total interest payable over the 20-year-period stands at Rs. 32,85,213. The total outstanding, including principal and interest, is Rs. 52,85,213 (Rs. 20,00,000 being the principal loan and Rs. 32,85,213 the interest on the loan).

Now let us assume that the repo rate has gone up, leading to the interest on MSME loans going up by 2% to 14% per annum. 

Amount of business loan: Rs. 20,00,000

Interest rate: 14% per annum

Loan tenure: 20 years 

When we enter the revised interest rate in the business loan calculator, we find that our EMI has gone up to Rs. 24,870 per month. Our total interest outgo for the same period has also increased to Rs. 39,68,900. We would also have a total payout commitment of Rs. 59,68,900.

Per the above calculation, with a 2% increase in annual interest rates, our monthly EMI liability goes up by Rs. 2,848, and total interest and total loan amount also go up by Rs. 6,83,687.  

Eligibility criteria for business loans and loan application process

MSME loans

Who is eligible for MSME loans?

  • Individuals between 21 and 65 years of age
  • At least 5 years of experience
  • Business operational for at least a year with a minimum monthly turnover of Rs. 2,00,000

How to apply for MSME loans?

  • Submit an online application after ensuring every detail entered is correct.
  • Upload all the required documents.
  • The Credit score is analysed.
  • The loan amount gets disbursed

There are lenders who provide MSME loans without collateral. This means, we don’t need to provide any asset as security or collateral to the lender. 

Loans for Women

Business loans for women have the following features:

  • Faster processing
  • Flexible repayment options
  • Help in boosting credit scores
  • Do not require collateral
  • Need minimum documentation

There are two types of business loans for women:

  • Small Business Finance
  • Commercial Business Loans

How Can EMIs on Msme Loans Be Reduced?

We can lower the EMIs on MSME loans even with a repo rate hike in the following ways: 

  • Borrowing only the required amount
  • Comparing the interest rates on loans
  • Extending the repayment period
  • Prepaying the loan if possible
  • Going for loan refinancing

Final Thoughts

Repo rate hikes lead to a higher rate of interest on term loans, but with easy financing through online lending platforms like FlexiLoans, we don’t need to worry about starting or expanding our business. There are several ways to make loans affordable through options like refinancing, prepayment, and more. 

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