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Rates On Loans Are Changing All You Need to Know
Last year, the Reserve Bank of India (RBI) changed the rules of the retail loans and made it mandatory for banks to link their loans to an external benchmark set by the RBI. The difference between the earlier loan rate (marginal cost of funds-based lending rate or MCLR) and the external benchmark was so contrasting that it was easier for borrowers to take the decision of shifting from one rate to another.
But, the new rules and guidelines made by the RBI blurred that contrast of difference. Now, should the borrower stick to the MCLR or shift to the new external benchmark?
On Feb 6, the RBI announced that it is not going to cut the repo rate but meanwhile introduced a new instrument called long-term repo operations or LTRo. The LTRO is going to bring down the cost of funds for PSU and private sector banks. This cost-cutting will ultimately lead to banks lending loans on cheaper rates.
Many banks have already lowered their marginal cost of funds-based lending rates. SBI has reduced it to 7.85 per cent while Bank of Baroda has lowered it to 8.15 per cent.
A customer can reset loan rates regimes annually. If one has his/her loan attached to the previous loan rate regimes, when repo-rates were attached to the loans, one can change it to the new LTRo. But the problem is that the difference between the old regime of repo-rate and LTRo is only 10 bps where one bps is one-hundredth of a percentage point. So, the difference is not that much.
For example, if a person has taken a home loan of â‚¹ 35-75 lakh in April 2019, the interest rate paid on that loan is 9.20 per cent. And if that person changes reset the loan rates, it would only reduce to 8.60 per cent.
According to banking pundits, if a borrower’s loan rates are going to automatically change in the next three-four months, the borrower doesn't need to change them manually. Because the market is expecting that the change in RBI’s policy is going to further reduce the MCLR.
But if changing the loan rate from repo-rate to MCLR is going to reduce interest rates at contrasting bps, it is better for the borrower to do it.
While it is true that the RBI has not changed the repo-rate, still there are indications that the banks are going to lower their interest rates with the increased liquidity and lowered the cost of funds. And if banks don't change their interest rates in the upcoming three-four months, a borrower can change to the new regime.