How far Personal Loan, Home Loan EMIs Will Come Down after Rate Cut by RBI?

Following the repo rate cut by the Reserve bank of India in its bi-monthly Monetary Policy held on February 7, the banks are likely to reduce interest rates for retails loans such as Home Loans and Car Loans.

Setting the stage for lower lending rates, the Monetary Policy Committee (MPC) unanimously announced a decrease in repo rate by 25 basis points to 6.25 percent. Repo rate is the rate at which the central bank lends to the banks. One basis point is one-hundredth of a percentage point.

Two weeks later, the RBI Governor Shaktikanta Das met the bankers on February 21 to discuss the delay in the lending rate reduction and address effective transmission of monetary policy.

According to media reports all the leading banks, including heads of Punjab National Bank, Bank of Baroda, Bank of India, ICICI Bank, Kotak Mahindra Bank, and IDFC First Bank, among others attended the meeting with the RBI chief. The reports also cited that the RBI Governor Das has asserted a need to reduce loan interest rates following the cut in policy rates so as to pass the benefit to the consumers.

The bankers, as reported, have assured the Governor that they will reassess their marginal cost of funds based lending rates in their monthly asset liability committee review. Besides, it is important to note here that the lenders are also supposed to adopt a new lending pricing method based on external benchmark from April 2019.

Just a day after the RBI’s policy rate cut, the largest lender of the country- the State Bank of India (SBI) announced the reduction in Home Loan rates by 5 basis points (bps) for borrowers who take a loan up to Rs. 30 Lakh. However, SBI’s cut was on the spread and not MCLR.

After SBI, Bank of Maharashtra also reduced its six-month MCLR, but primarily it lends on 1 year MCLR. It is expected that the other lenders will soon follow suit and the rate cut benefit will be transferred to the consumers.

How the would rate cut benefit the Home Loan borrowers?

Your Home Loan has two components – Spread and MCLR. The spread continues for the lifetime of the loan and is based on creditworthiness and risk assessment of the profile. Thus the reduction in Spread only benefits the new customers and not the existing customers.

Next component is MCLR. The MCLR is linked to your deposit rates. A change is unlikely unless fixed deposit rates are also subdued. Also, a change in MCLR is not going to impact your Home Loan instalments in the short term immediately. For, a majority of Home Loans are linked to one year MCLR.

Thus if you are planning to borrow a Home Loan, make sure you compare the lending rate with the help of loan aggregator websites and consider all costs involved such as processing fee, administrative charge, stamp duty besides interest rates.