What do new RBI guidelines mean to you?

Highlights

  • RBI has asked banks to link floating rate loans to external benchmarks such as repo rate or 91 days Treasury Bill or 182 days Treasury Bill.
  • Read the impact of shifting from MCLR to new benchmark.

In its fifth bi-monthly monetary policy held on December 5, 2018, RBI has kept its repo rate unchanged at 6.50%. In this meet, RBI has asked all the banks to adopt new external benchmark rates for MSME loans such as home loans and car loans from April 1, 2019.

New Benchmarks for floating rate loans as per RBI

RBI has made it mandatory for all banks to link all new floating rate loans to one of the following:

  1. Reserve Bank of India policy repo rate
  2. Government of India 91 days Treasury Bill yield produced by the Financial Benchmarks India Private Ltd (FBIL)
  3. Government of India 182 days Treasury Bill yield produced by the FBIL
  4. Any other benchmark market interest rate produced by the FBIL

Existing Interest Rate Benchmark – MCLR

Marginal Cost of Lending Rate (MCLR) is associated with floating rate home loans. A change in repo rate decides whether MCLR is beneficial for you or not. MCLR depends on:

  • Tenor premium
  • Operating costs of the bank
  • Negative carry on Cash Reserve Ratio, and
  • Marginal cost of funds

As per RBI guidelines, MCLR functions as follows:

  • Fixed rate home loan is not affected by MCLR.
  • Deposit balances and other borrowings are considered while computation of marginal cost of funds.
  • Banks must publish marginal cost of funds based lending rate for different tenures.
  • MCLR as on the sanction date of the floating rate home loan stands the same till next reset date.
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Banks review MCLR for the following tenures:

  • Overnight
  • Fornight
  • One Month
  • For three months
  • One Year
  • Two Years
  • Three Years
  • MCLR for a maturity as the bank deems fit

Different Benchmarks as per RBI guidelines

Repo rate is the rate at which RBI lends money to commercial banks. After the replacement of existing benchmark (MCLR) with a new benchmark which could either be Repo rate or 91 days Treasury Bill or 182 days Treasury Bill, home loan rates are likely to increase. So let us see the difference between existing and new guidelines.

S.No.FactorsAverage MCLR at different lenders (Existing Benchmark)Repo Rate (New Benchmark)91 days Treasury Bill (New Benchmark)182 days Treasury Bill (New Benchmark)
1Rates8.60%6.50%6.80%7.10%
2Reset PeriodYearlyBi-Monthly3 months6 months
3Methodologies adopted to ascertain benchmarksTenor premium, Operating cost of the bank, Negative carry on Cash reserve Ration, and Marginal cost of fundsInflation, Liquidity, and other macroeconomic indicators.Money market movementsMoney market movements

Impact of New Interest Rate Benchmark on Home Loans

On the basis of existing average MCLR and average spread in the market, the lowest home loan rate is 8.80% per annum. Banks will be switching to new benchmark with an average of 6.80%. Over this rate, banks will apply their spread. So, even though change from MCLR to any of the above mentioned benchmarks will bring transparency in the process, loans may get cheaper.

The reason behind this is that, floating rates on loans have a spread over the benchmark rate and RBI has asked banks to fix this spread throughout the loan tenure. This spread will be fixed throughout the tenure unless a borrower’s credit assessment undergoes a substantial change and as agreed upon in the loan contract. So, continuous EMI payment becomes important to avoid rate hike and a smoother transparent process during the loan tenure.

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What should home loan borrowers do?

There are three categories of borrowers in the market today. Each of the category of borrowers would have a different impact and thus different solutions.

  1. New home loan borrowers – Those who are planning to take a home loan for the first time may wait a bit longer as there are only 4 months left for the implementation of new benchmark rate. Also, interest subsidy scheme – PMAY is also available till March 2019. So, to get the benefit of these two, you can plan to take a home loan as soon as possible.
  2. Existing home loan borrowers with loans linked to MCLR – The increase in home loan EMI is possible after the reset date of lending rate. On the reset date, your new EMI will be calculated on the basis of the new interest rate applicable as per the new lending rate benchmark. Many banks and NBFCs have increased their lending rate due to rise in cost of deposits even though RBI has kept its repo rate unchanged. So, as an existing home loan borrower, you may compare all the available options available for a home loan and balance transfer to a lower rate.
  3. Existing home loan borrowers with loans linked to Base Rate – There are few borrowers who have their home loans still linked to base rate and not MCLR rates. Such borrowers may switch their home loan to MCLR as of now because there is no clarity on how the rate is going to change in the future. So, to be on the safer side, converting your existing base rate linked home loan to MCLR is better.
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Impact of New RBI Guidelines on Real Estate

The real estate is likely to reinforce confidence in the home buyers which would then result in improved sales. In another decision, RBI issued final guidelines regarding stipulating a mandatory loan component in working capital finance for borrowers.

Change in Lending Rates in the recent years

In 2016, banks were asked to change floating rate loans from base rate to MCLR as per RBI guidelines. The purpose was to bring more transparency in the home loan process. However, this year, MCLRs of banks are rising constantly resulting in raising the home loan rates.

Again after 2 years, RBI has taken an initiative and this time it has asked to bring in external benchmark (repo rate, 91 treasury bill, 182 treasury bill or any other FBIL) for floating rate loans. Unlike now, lenders have different interest rate benchmark and spread on the basis of which they offer loans. The customers had no choice and had to take a home loan with that MCLR only.

But, post the implementation of new guidelines, new benchmark rate will be decided by RBI which means it will same at all lenders. Talking about the spread part which adds up to the benchmark to become total interest rate, it will be negotiable on the basis of credit assessment done by the lender. Those having a good profile (high CIBIL score and income) and maximum eligibility for a lower rate, are going to get a lower spread over the set benchmark. It can be said that even though the change in benchmark will bring transparency, lenders may still play their part on the spread part.

Personal Loan Interest Rates December 2018
Bajaj Finserv10.99% - 16.00%
Fullerton India14.00% - 33.00%
HDFC Bank11.25% - 21.50%
ICICI Bank10.99% - 18.40%
IndusInd Bank10.99% - 16.00%
Kotak Bank10.99% - 20.99%
RBL13.00% - 18.00%
Standard Chartered Bank12.00% - 17.00%
Tata Capital10.99% - 18.00%
Home Loan Interest Rates December 2018
State Bank of India/SBI8.75% - 9.35%
HDFC8.80% - 9.70%
Bank of Baroda8.65% - 9.65%
LIC Housing8.85% - 9.05%
PNB Housing Finance9.00% - 13.00%
ICICI Bank9.10% - 9.35%
Axis Bank8.85% - 9.10%
Citibank9.00% - 9.85%
Indiabulls Housing Finance Limited8.80% - 11.05%
Kotak Bank8.90% - 8.75%
DHFL9.05% - 9.95%
Reliance Home Finance8.75% - 14.00%