mclr rate

Does the MCLR Rate Hike by Banks Signal Higher Interest Rate Regime?

Kolkata-based businessman Akash needed a home loan but the recent move by the State Bank of India — the nation’s largest bank — has made him anxious about the idea of applying for a bank loan. Not just Akash, loan borrowers all over the country are worried about the possibility of home loan rates going up. Earlier this month, SBI announced a hike in marginal cost-based lending rates (MCLR) across most maturities. Many other banks including PNB, ICICI, Axis Bank, and HDFC are following suit. This means that loans ranging from personal to home loans, is likely to become costlier.

This comes after the Reserve Bank of India (RBI) announced that the base rate for loans given by banks will be linked with MCLR at the start of the new financial year, i.e. 1st April, 2018. The MCLR rate system was first introduced exactly two years ago, on 1st April, 2016, to solve the problems related to the prevalent base rate system. While it was expected that the existing home loans and other credit exposures linked to the base rate system would migrate to MCLR, it didn’t happen. That’s about to change.

How will this Affect You?

While this move has been designed to benefit the borrower, it may make loans pricier. Linking base rate with MCLR will make both of them go hand in hand. So when a bank increases its MCLR, the base rate will increase, and vice versa. However, the true impact of RBI’s decision on existing borrowers will be clear only when a detailed report comes out.

Earlier, there has been a lot of grievances about banks taking a long time to pass on the benefits of an RBI benchmark rate cut. Sometimes borrowers never received the full benefits. RBI’s recent move is believed to be a step forward to address these issues. It is expected that the new system will completely eliminate the time lag and discrepancies associated with the base rate regime, and will facilitate an instant reduction in the interest rates post-RBI repo rate cuts.

Though all of this sounds good, it could disappoint existing and new home loan borrowers if they are expecting a cut in home loan interest rates. Post-RBI declaration, SBI, and many other banks raised their MCLR. According to reports, SBI — which holds more than one-fifth of the country’s banking assets —has increased the 1-year MCLR to 8.15%, from the present 7.95%. This is the first hike of SBI’s MCLR rate, since the inception of MCLR based lending system in April 2016.

ICICI Bank — India’s biggest private sector bank — and Punjab National Bank have also raised the MCLR rate, though by a slightly lesser magnitude, compared SBI. As per Thomson Reuters’ data, other lenders like HDFC are also reviewing the rates and might declare a hike in interest rates as well in near future.

Since now home loans will be linked to MCLR, an increase in the MCLR rate will make home loan rates shoot up unless banks decide to reduce their margin (markup) on loans. So ultimately, loan customers will get the benefits of future RBI rate cuts straight away, but as of now, they will have to pay higher EMIs for any type of loan.

MCLR Rate in Action

All banks and financial institutions, under the MCLR mode, will have to review and declare interest rates on a regular basis, typically after every month end. However, when it comes to home loans, the interest rate in the MCLR based lending pattern will get re-priced periodically. According to a recent press release by RBI, “the periodicity of the reset” will be one year or lower. As per the new RBI rules, from now on, banks will have to specifically mention the periodicity of reset in every home loan contract they enter with borrowers.

RBI has also mandated the banks to allow borrowers to migrate from base rate to MCLR rate from the start of next month. However, borrowers with existing home loans have the choice to continue with the base rate mode till their loans mature. If they want a switchover to MCLR based lending, banks will have to honour their request with immediate effect, or they can get their home loan refinanced from another bank.

Many borrowers have already shifted their home loans from the base rate mode to the MCLR rate system to enjoy the full benefits of RBI rate cuts as soon as they are announced.

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