The Reserve Bank of India (RBI) has possibly pulled off the biggest economic coup-de-etat that no one saw coming this year. In 2019 alone, the apex bank has cut repo rates four times in a growing bid to boost consumption and lower lending rates, particularly for home loans which represent a major growth sector for the Indian economy on almost any paradigm.
Additionally, sometime earlier, the country’s biggest bank in terms of sheer size, State Bank of India (SBI) decided to innovate a step further. The bank started offering home loans tied to the repo rate, thereby acting on the RBI’s nod to all banks to enable better transmission of rate cuts to end consumers. This has the potential to become the latest and biggest new trend in terms of loans. Several other banks apart from SBI, have already lowered their MCLR just before or soon after the repo rate cut and they might now be considering specialized repo rate based loan offerings for borrowers.
Bank of Baroda joins the bandwagon
Bank of Baroda (BoB), which was in the news sometime earlier for a mega-merger where Vijaya Bank and Dena Bank were amalgamated into it, is another new entrant on the scene. Bank of Baroda, much in the mold of State Bank of India, will now be offering a repo rate linked home loan to borrowers.
Here are some key aspects worth noting in this regard:
- Customers at Bank of Baroda who are applying for home loans, will be provided an option to choose between the interest rate tied to the repo rate fixed by the RBI or the interest rate linked to the bank’s own MCLR (marginal cost of funds based lending) which is indexed to the cost of funds for BoB.
- This new home loan product has already been officially announced by Bank of Baroda and comes after SBI released a similar product in the market.
- Post the latest move by the MPC (Monetary Policy Committee) of the RBI to slash the repo rate by 35 basis points, multiple public sector banks have stated their willingness to launch new home loan products which will be linked to external benchmarks, most likely to be the repo rate.
- These banks include Allahabad Bank, Union Bank of India and Syndicate Bank among others.
- The new repo rate linked financial products will be kept for home loans and automobile loans at Bank of Baroda and other PSBs at the moment.
- Customers at Bank of Baroda can opt for the MCLR tied loan offering which has an interest rate of 8.45%.
- Home loans can be applied for at an interest rate of 8.45% onwards linked to the MCLR at Bank of Baroda.
- Home loans tied to the repo rate will start from 8.35%, meaning another additional benefit of 10 basis points as compared to the MCLR rates.
Market trends to note
Union Bank of India has already concluded its ALCO (asset-liability committee) meeting and has stated that for enabling swifter and improved transmission of interest rates to customers, it will be linking its vehicle and home loans to the RBI’s repo rate soon. Many other banks are expected to follow suit.
Monetary policy transmission has been deemed somewhat unsatisfactory so far by customers and the apex bank alike. In spite of the repo rate coming down cumulatively by a whopping 75 basis points between February and June 2019, banks have only lowered the WALR (weighted average lending rates) by just 29 basis points for fresh rupee loans in this duration as per the statement issued by Shaktikanta Das, the Governor at RBI sometime earlier.
MCLR cuts are also on the cards across several other banks. Bank of Baroda has already reduced its MCLR (marginal cost of funds based lending rate) for all 5 tenors by 15 basis points. This has been made effective from the 7th of August, 2019. The new 1-year MCLR stands at 8.45% as compared to 8.60% previously. Most loans are tied to 1-year MCLRs in most cases. The overnight MCLR has come down to 8.05% from 8.20% earlier while it is 8.15% from 8.30% for 1 month. The 3-month MCLR is 8.25% now as compared to 8.40% previously. Additionally, the 6-month MCLR stands at 8.40% as compared to 8.55% earlier. This will certainly make Bank of Baroda home loans more attractive for borrowers across the spectrum.
FD rates come down at Bank of Baroda
Bank of Baroda has also lowered its fixed deposit (FD) rates in keeping with the current market trends where home loan interest rates are also coming down. Rates of interest between 4.50-6.60% per annum are now being offered by BoB for tenors varying from 7 days to 10 years.
The rates of interest have been reduced and now stand at the following:
- FD rates are 5.25-6.25% per annum for deposits with tenors of 7 days to less than 1 year.
- 1-year term deposit rates are now 6.45% as compared to 6.70% earlier.
- 60% is the FD rate for tenors above 1 year to 400 days as compared to 6.85% previously.
- FDs that mature for above 400 days and less than 2 years, 6.55% is the rate of interest.
- For deposits between 2-5 years, BoB has fixed the interest rate now at 6.45% as compared to 6.70% previously.
- For deposits between 5-10 years, the rate of interest is 6.45% per annum as compared to 6.70% earlier.
- Special rates of interest are offered for senior citizens at Bank of Baroda.
After the rate cut by the RBI on the 6th of June, 2019, several banks like IDFC First Bank, ICICI Bank, Punjab National Bank, HDFC Bank, Axis Bank, and Kotak Mahindra Bank have lowered rates of interest on fixed deposits.