It could be due to ignorance, but many SBI home loan customers are still paying higher rates of interest even though better and cheaper options are available. About a quarter of SBI’s home loan customers in the entire home loan portfolio of Rs 3.72 lakh crore, are paying their home loans according to the older base rate regime that had higher rates of interest. Some of the customers are also voluntarily paying the higher interest rates and SBI is the largest bank in the country and represents one fifth of the banking industry in terms of total assets.
SBI charges an average interest of about 9.40% on base rate home loans and about Rs 1 lakh crore of home loans still fall under the older base rate regime. The base rate is much higher than the 8.85% of the MCLR lending rate that is currently used. MCLR regime had replaced the base rate home loans and the home loan portfolio under MCLR is about Rs 2.70 lakh crore. It is much better than the older regime and offers more flexibility to the borrowers as well.
Key aspects worth noting in this regard
The RBI has also now directed banks to move from the MCLR to repo- linked rates as even the MCLR does not correctly represent the transmission of rates when interest rates are declining in the current scenario. What is surprising is that SBI still has a home loan portfolio which is close to Rs 5000 crore that is still under the old PLR lending regime. That existed about a decade ago and PLR customers are still paying the 11.02% interest rate for their home loans. The customers of base rate, PLR and MCLR can easily switch to the new repo- linked interest rates if they want to. However, it has also been seen that MCLR customers are not moving as quickly as they should to make the most of the new repo- linked interest rates.
Some interesting facts can be noticed if one happens to analyze the SBI home loan portfolio and it can be seen that there are three broad interest rate buckets. The repo- linked interest rate had started from October. At present, the outstanding home loan portfolio of SBI stands at around Rs 3.72 lakh crore which was for the months of April to June in 2019- 2020. On the other hand, a high number of customers paying interest rates according to the older rates also happen to be good for the banking structure as it provides opportunity to play around by charging higher rates and experimenting with rates. The banks are continuing to charge higher interest rates although interest rates have significantly come down in the last one year or so. It has also been seen that banks are not very transparent when it comes to fixing cost of funds and risk premiums and margins.
What you should keep in mind
The new repo- linked interest rates are better as they offer a clear industry standard for repo rates as well as some other costs. Customers have the opportunity now to compare rates across various banks by comparing how much they would have to pay over and above the repo rate.
On the other hand, banks are also charging higher rates of interest from customers who have a poor credit score, i.e. lower than the ideal score of 700. Three public sector banks have specified higher risk of 5 to 10 basis points from such borrowers. A score over 800 is considered very good, a score between 700 to 800 is acceptable and below 700 is considered risky. The base rate period lasted from July 2010 to April 2016 and it was calculated on the basis of average costs of funds, operating costs and also negative carry of cash reserves ratio along with profit margins. The base rate was part of a rigid structure as it considered the average cost of funds. RBI had later come up with an improved MCLR and that took the marginal cost of funds based rate to decide on the final lending rates. Even this has not worked as well as the RBI thought it would.
Many experts are of the opinion that the repo- linked regime could have an impact on margins of banks as transmission would be quicker to customers. However, this could still take a considerable amount of time since most banks have large portfolios of customers from older regimes including SBI. These customers, for reasons of their own, are not too keen on switching to the new repo rate linked regime for home loans.