Loans Begin to Get Cheaper with New Interest Rate Formula

Home loans have started becoming cheaper.EMIs will fall by over Rs 300 for those who avail a Rs 50 lakh, 15 years loan.


Benchmark To Be Revised Monthly | SBI Reduces Rates

Home loans have started becoming cheaper.EMIs will fall by over Rs 300 for those who avail a Rs 50 lakh, 15 years loan. The country’s largest lender State Bank of India has cut its home loan rate to 9.4% with effect from April 1 from 9.5%.

The revision follows a shift in the way banks across the country calculate their lending rates. New rules announced by the Reserve Bank of India in December 2015 take away from banks the freedom to decide when to revise rates. Rates will have to be decided based on the marginal cost of funds’. In other words, banks have to routinely calculate their cost of funds and any change has to be passed on to borrowers by revising their benchmark. This new formula-based benchmark is called the marginal cost of lending rate (MCLR).

ICICI Bank has also announced a one-year MCLR of 9.2% -the same as SBI -but the bank has not yet announced the mark-up at which it will provide home loans.

“SBI is the market leader in home loans with a portfolio of over Rs 1.9 lakh crore. This year, we have seen a year-on-year growth of 18% in home loans and we expect this growth to continue,“ said Rajnish Kumar, MD, SBI. He said rates on other personal loans were also revised and SBI was planning a new competitive fixed rate auto loan. Current borrowers will also have the option to switch to the new rates, but will have to pay a small switching fee.

HDFC Bank has also announced a one-year MCLR of 9.2% as against its base rate of 9.3%.However, the home loans sold by the bank are disbursed by pa rent HDFC, for which the prime lending rate (PLR) determines the cost of loans.

ICICI Bank also reduced interest rates on deposits above Rs 1 crore by up to 55 basis points (100 basis points = one percentage point). Officials said that since the next review will happen a month later, there will not be any immediate cut in lending rates after RBI’s April 5 policy .

The earlier benchmark of `base rate’ was calculated on average cost of funds. The MCLR keeps getting revised every month as cost of new deposits changes. But once a loan has been availed, borrowers will see their rates being reset after one year. This is because SBI will apply one-year lending rates to floating rate mortgages. At the end of a year, the home loan rate will be reset in line with the prevailing MCLR.

For new borrowers, things will be slightly different. A borrower in April 1will get loans at the prevailing MCLR (9.3%), but a month later a new borrower might get a loan at a lower MCLR if the cost of funds drops. For the April borrower, it will take three more quarters for his loan to get reset. In other words, there could be 12 sets of one-year MCLR if cost of funds change every month.

The monthly revision and the annual reset are one aspect of the new lending rate rules. In his bid to ensure that banks pass on reduction of interest rates to borrowers, RBI governor Raghuram Rajan has asked banks to come up with a whole range of lending rates for varying maturities. For instance, SBI has announced seven rates -overnight (8.95%), monthly (9.05%), three months (9.1%), six months (9.15%), one year (9.2%), two years (9.3%) and three years (9.35%).


New Benchmark Rate Explained

What is marginal cost of funds-based lending rate?

MCLR is a benchmark rate which reflects the cost of funds for a particular tenure. For instance, if a bank cuts its one-year deposit rate, its one-year MCLR will see a decline.

How is it different from the earlier benchmark?

The earlier benchmark was the `base rate’. This was calculated to reflect average cost of funds.The base rate did not change if banks lowered deposit rates as existing deposits continued to earn interest on old rates.

How is MCLR better?

Borrowers do not have to wait for the average cost of deposits for a bank to come down. The MCLR is reviewed every month based on prevailing costs of funds. So older customers will continue to pay old rates until the reset date (once a year). But new borrowers will get loans at new rates. MCLR will ensure banks pass on rate cuts immediately.



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