Home loans are set to get cheaper with banks start implementing the new lending rate structure called marginal cost based lending rate (MCLR) from Friday. The new rate setting structure, which asks banks to price loans based on the marginal cost of deposits rather than average cost, comes into effect from 1st April.
The State Bank of India (SBI) on Thursday became the first bank to announce its MCLR. Home loans from country’s largest bank will be cheaper by 0.10% for new borrowers under the MCLR formula from 1st April.
SBI’s home loan rate was 9.55 per cent (base rate of 9.3 per cent plus 25 basis point premium for home loan). But from 1st April under MCLR structure, new sanctioned home loan rate to be 9.45 percent with MCLR for one year – 9.20 per cent plus 25 basis point premium. One basis point is equal to one-hundredth of a percentage point.
Thus, for women borrowers, the new rate will be 9.40 per cent against 9.50 per cent under the previous base rate formula, while other borrowers would be charged 9.45 per cent against 9.55 per cent.
“The new borrower will save about Rs 600 per month on Rs 1 crore loan,” said Arundhati Bhattacharya, chairman of SBI. Current home borrowers would get the option to switch to new rates by paying a small switching fee.
The announcements came in the wake of the Reserve Bank of India (RBI) asking banks to price all loans with reference to the marginal cost of funds-based lending rate (MCLR) to ensure that banks pass on reduction of interest rates to borrowers. RBI prescribed new system to improve transmission of monetary policy in December 2015 and directed banks to move to this new system of loan pricing from 1st April.
Instead, of one benchmark, banks would need to publish MCLR for at least five tenures of loans which include overnight, one month, three month, six months and one year buckets. RBI has left it to banks for giving more rates for longer tenures.
SBI has announced seven benchmark MCLR rates based on different tenures such as overnight at 8.95%, one-month at 9.05%, three-month at 9.10%, six-month at 9.15%, one-year at 9.20%, two-year at 9.30% and three-year at 9.35%.
A clutch of banks, including HDFC Bank, Bank of Baroda and State Bank of Travancore followed suit by announcing their MCLR for various tenors. Others who announced their MCLR are Canara Bank, Union Bank of India and Punjab National Bank.
HDFC Bank will now have an MCLR of Overnight loan at 8.95%, while one month, at 9.05%, three months at 9.10%, six month at 9.15% and one year at 9.20%, two year at 9.30%, three year at 9.35% and the longer tenure loans of five year at 9.80%.
Bank of Baroda will have MCLR of overnight and one month loan at 9%, 3 months at 9.05%, 6 months at 9.10%, one year at 9.30%, 3 year at 9.35% and 5 year at 9.65%. The bank’s base rate till now was at 9.65%.
State Bank of Travancore has higher rates with overnight rate at 9.35%, 3 month at 9.55%. Canara Bank pegged its 1 year rate at 9.40% and five year at 9.70% and Punjab National Bank kept its 1-year rate at 9.40% and five year at 9.70%.
ICICI Bank has not yet announced the mark-up at which it will provide home loans.
The earlier benchmark of ‘base rate’ was calculated on average cost of funds. The new framework requires banks to set rates based on their marginal cost of funds rather than their average cost of funds. This new formula-based benchmark is called the marginal cost of lending rate (MCLR). It was introduced to improve the transmission of cuts in policy rates to the end-borrowers.
The MCLR keeps getting revised every month as cost of new deposits changes. Under the new formula, changes in interest rates would not be automatically result in revision of rates for the borrower. But once a loan has been availed, the home loan rate will be reset only after one year in line with the prevailing MCLR.
The monthly revision and the annual reset of rates are one aspect of the new lending rate rules. In a falling interest rates scenario, the borrower will get the benefit only after a gap of one year. But the flip side of it is that the borrowers would be protected whenever the rates go up either as the new rates would be applicable when they are due for reset. Now, the loan contract will have a reset clause and interest rates will be revised on the date mutually agreed between the borrower and the bank.
MCLR is expected to improve transmission of policy rate cuts to bank loan rates. Home loans have started becoming cheaper even ahead of the monetary policy review meeting of RBI next Tuesday. Home loan rates may fall further if the RBI cuts rates at its monetary policy next week.
Ajay Verma, founder, and writer of The Housing World, a real estate and mortgage news website. He has over fifteen years of rich experience in the above-mentioned industries.