Why Loans may pinch more in-spite of RBI keeping status quo on rates

Why Loans may pinch more in Delhi NCR and all over India

The Reserve Bank of India (RBI) might have kept the repo rate unchanged at 6 percent in its first bimonthly review for the financial year, but it would be untimely for home loan debtors to celebrate.

This is because EMI on loans may still go up as some banks have already increased their marginal cost-based lending rates (MCLR) above the last month due to increasing cost of funds. Repo rate was previously cut in August 2017 when it was brought down by 0.25 percent.

All banks loans, including home loan which has been taken after 1st April 2016 are linked to a bank’s MCLR and any rise in it will push the interest rates higher. As things viewpoint today, the interest rate seems to either remain quiet or there exists a remote option for them to move up in the near term.  If liquidity in the system increases and inflation is well under RBI’s target, borrowers, both current and new, will have to make do with a high-interest rate regime.

Home loan rates of 8.4%, the EMI on Rs. 1 lakh loan for 15 years comes to around Rs. 979. If the rate is increased by 100 basis points, the EMI will be increased to Rs. 1038, there is a bit difference between Rs. 59 or about 6% increased.

Rising MCLRs

Remarkably, State bank of India, the country’s top lenders by assets had increased its MCLR across most of the maturities in March. Other banks might hike their MCLR too and thus EMIs may increase.

Base rate fails

It is more important to note down that different loans taken before 1st April 2016 which are still linked to the base rate are still being serviced by the borrowers. They stand to advantage only when the bank will cut its base rate. Not many banks have cut their base rate in the recent past. Effective from 1st April, Allahabad bank had cut the base rate to 9.15% from 9.60% and even its benchmark prime lending (BPLR) has been brought down to 13.540% from 13.85%.

RBI in February meet had given the statement that, Since MCLR is more delicate to policy rate signals; it has been decided to match the methodology of the defining benchmark rates by linking the base rate to the MCLR with effect from 1st April 2018.

MCLR linked Home Loan

Banks yet might or might not lend to MCLR. They may request for a spread or a markup or a boundary. The authentic home loan interest rate can be equal to the MCLR or have a “markup” or “spread”, but can by no means be lower than the MCLR.

To apply for home loan, business loan, loan against property

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