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Is the transmission of lower rates to customers finally taking place?


Is the transmission of lower rates to customers finally taking place?

Home loan interest rates have always been a bone of contention for several applicants and home loan borrowers over the last few years. The MCLR system was implemented sometime earlier although it did not quite lead to the transmission of lower rates of interest to customers whenever the RBI (Reserve Bank of India) cut repo rates. The RBI was pushing Indian banks over the years to transmit interest rates more effectively and swiftly to customers however banks have not been ready to pass them on fully.

As a result, the total impact of a rate cut is not always beneficial for home loan borrowers who already have loans although they often expect their EMIs and interest outgo to come down. Yet, in the current scenario, transmission of lower rates of interest may finally be taking place, much to the relief of home loan borrowers. Here’s delving a little deeper into the present market situation.

RBI and Government initiatives improve overall transmission of rates

The efforts of the RBI (Reserve Bank of India) and the Central Government seem to be becoming more effective in the recent scenario as per reports. This will naturally benefit more home loan borrowers in times to come. SBI (State Bank of India), the biggest lender in the country, confirmed that it will be launching an innovative home loan product linked to the repo rate from the 1st of July, 2019. This landmark decision by the SBI is expected to be emulated by several other lenders in the country since SBI already holds market leadership with close to 35% of market share in the home loan category.

The new SBI home loan offering is in sync with the directive issued by the RBI (Reserve Bank of India) to Indian banks for syncing their rates of lending to any external benchmark like the G-Sec rate or the repo rate. This directive has been issued in a bid to ensure swifter transmission of rates to customers. The RBI has already put this directive on pause and a circular will be released soon in the near future as per reports.

Key aspects to keep in mind

  • This new move will be catering to the pent-up demand of home loan customers over decades about faster transmission of benefits of rate cuts.
  • For the new home loan product from SBI, in case interest rates are slashed by the RBI, home loan customers will be benefited instantly.
  • However, in case the repo rates increase, rates of lending will increase instantly as well.
  • Loans are presently tied to the MCLR (marginal cost of funds based lending rate).
  • The RBI has reduced the repo rate to the tune of 50 basis points between the months of February and May 2019 in a bid to bolster economic progress.
  • In comparison, the MCLR has only reduced by just 21 basis points for new home loan customers.
  • It has also increased by 4 basis points in case of older home loan customers.
  • The RBI has already cut repo rates this month for the third time in succession. The cut has been to the tune of 25 basis points.
  • The rate of interest on a home loan tied to the repo rate will be around 8.40% once the home loan product has been officially unveiled by the SBI.
  • SBI senior officials have already stated that the MCLR of any bank is dependent on the cost of funds of the bank. The 1-year MCLR at SBI stands at 8.45% and several customers have the MCLR at 8.55% which is 10 basis points more than the regular 1-year MCLR.
  • The home loan linked to the repo rate comes at 8.40% which is more affordable than the MCLR tied home loan by 15 basis points.
  • However, the difference may be reducing in the future in case the MCLR goes downwards after efforts by SBI.

Some experts have contrasting views on the entire scenario. Some industry experts feel that MCLR comes from a specific formula where a vital role is played by the repo rate. As a result, any changes in the repo rate will be having an impact on the MCLR as well. The difference between the two key benchmark rates is as thus- the repo rate tied home loan will be affecting the customer immediately while the MCLR will be affecting the customer annually once the next reset period arrives.

Many industry experts feel that over a sustained duration, most Indian banks will possess just a single benchmark with the repo rate being one of the benchmarks chosen by them. This decision will lead to higher transparency overall and better pricing of home loans for end consumers. Many Indian banks may also have a framework that enables customers to switch between benchmarks for their home loans.


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