The second bi-monthly RBI monetary policy review of 2017 is set to happen tomorrow i.e. April 6. Seeing the RBI’s shift from accommodative to a neutral stance, there is a widespread speculation that the central bank may hold on to the key policy rates, continuing from where it left off in February this year. Repo rate, at which the RBI lends money to commercial banks for their short-term needs, was left unchanged at 6.25% in Feb. And with inflation figures showing a bit of discomfort among the policy makers, don’t be surprised if the rates are unchanged this time around as well. The report on monsoon is also not encouraging with the rainfall likely to be lower than expected. All these and more do make it slightly difficult for the home loan borrowers to enjoy the falling rates that they have been the beneficiary of in the recent times.
Will MCLR Go for a Change? Heart Says Yes, Mind Says No
Banks respond to what the RBI does to the policy rates. From 3-4 months to February 2017, there has been a constant reduction in the repo rates, leading to the fall in Marginal Cost of Lending Rate (MCLR) across banks in India. There were times when the banks didn’t wait for the repo rate cut to transmit the benefits of lower lending rates to the borrowers by slashing their MCLR. Thanks to the demonetization, the banks saw the surge in the deposit volumes, giving them the headroom to slash their MCLR irrespective of the RBI rate cut. Taking a cue from the previous monetary policy, many banks refrained from slashing their MCLR. Very few banks did cut the rates and which were to the tune of 0.10%-0.15%. If the RBI does come with the neutral stance, banks could repeat the February episode. But what gives heart to the home loan borrowers is the fact that the banking system sits comfortably on an average monthly deposit pile of ₹4.68 lakh crore. This could translate into the lowering of home loan rates and add to the smiles of the borrowers.
How Would Your Lending Rate Look Like If MCLR Does Go Down?
Many carry the disbelief that MCLR is the actual lending rate on a home loan. In reality, the actual lending rate is a spread plus the 1-year MCLR as decided by the lender. Normally, the lending rate equals to 1-year MCLR+30-50 basis points.
For example-If two banks have the MCLR of 8.15%, the resultant lending rate can be 8.45% per annum at one bank and 8.65% at another. Want to know what constitutes the spread element of the lending rate? Take a look at the points below.
Operating Expenses – The day-to-day cost of managing the bank’s operation.
Cost to Maintain Cash Reserve Ratio – As you would know that the banks are supposed to maintain a cash reserve, popularly known as Cash Reserve Ratio (CRR), with the RBI. And in turn, the banks do not receive any interest on the said deposit. So, this comes out as a cost for the banks and get often passed on to the borrowers.
Marginal Cost of Funds – The interest offered by banks on products like savings, term deposits, foreign currency, etc, is termed as a cost for the bank. Even when the banks borrow from the RBI at the repo rate, it goes down as a short-term borrowing cost. While setting the lending rates, all these costs are passed on to the end consumers.
Tenure Premium – An additional slab of interest over the base rate depending on the tenure of the loan.