Individuals who have availed loans from lenders or banks before 1 April, 2016 will be paying the base rate and not MCLR. MCLR or marginal cost of funds based lending rate, when compared to the base rate compared, is seen to be lower by 5 to 50 basis points. This happens as the marginal cost of funds based lending rate is closely linked with the repo rate. Thus, there is better transmission of Reserve Bank of India’s rate cut to the borrower.
SBI's home loan EMIs to get cheaper due to MCLR cut
State Bank of India (SBI) has slashed the Marginal Cost of funds based Lending Rate (MCLR) across all tenors. Home loan accounts that are linked to the MCLR will now have cheaper Equated Monthly Instalments (EMIs) as a result of this. The one-year MCLR is now 7.00%, with effect from 10 July 2020.
On 17 April, the Reserve Bank of India had reduced reverse repo rates to 3.75% from 4%, a reduction of 25 bps across all tenors. Earlier, on 27 March, the RBI had reduced the repo rate to 4.40%, which was a cut of 75 bps while reducing the Cash Reserve Ratio (CRR) to 3%, which was a reduction of 100 bps. These measures were part of the stimulus package in response to the Covid-19 pandemic’s impact on the country’s economy.
|Bank Wise MCLR Rates : Tenor More Than 1 Year|
|Banks||3 years||2 years||1 year|
|State Bank of India||7.30%||7.20%||7.00%|
|IDFC First Bank||9.70%||9.50%||9.20%|
|Bank of India||8.20%||NA||7.70%|
|Allahabad Bank (merged with Indian Bank)||NA||NA||7.50%|
|Jammu and Kashmir Bank||8.30%||8.25%||7.80%|
|Central Bank of India||NA||NA||7.55%|
|United Bank of India (merged with Punjab National Bank)||7.85%||NA||7.60%|
|Union Bank of India||7.80%||7.75%||7.60%|
|Punjab and Sind Bank||NA||NA||8.15%|
|Bank of Baroda||NA||NA||7.65%|
|South Indian Bank||NA||NA||8.85%|
|Indian Overseas Bank||7.95%||7.95%||7.95%|
|Karur Vysya Bank||NA||NA||9.15%|
|Bank Wise MCLR Rates :Tenor Less Than 1 Year|
|Banks||6 months||3 months||1 months||Overnight|
|State Bank of India||6.95%||6.65%||6.65%||6.65%|
|IDFC First Bank||9.10%||9.00%||8.90%||8.90%|
|Bank of India||7.60%||7.55%||7.50%||7.00%|
|Allahabad Bank (merged with Indian Bank)||7.45%||7.40%||7.25%||7.20%|
|Jammu and Kashmir Bank||7.65%||7.35%||7.15%||7.05%|
|Central Bank of India||7.45%||7.30%||7.00%||7.00%|
|United Bank of India (merged with Punjab National Bank)||7.40%||7.20%||7.05%||7.05%|
|Union Bank of India||7.45%||7.30%||7.15%||7.05%|
|Punjab and Sind Bank||8.10%||8.00%||7.85%||7.55%|
|Bank of Baroda||7.50%||7.35%||7.20%||7.20%|
|South Indian Bank||8.50%||8.30%||8.20%||8.15%|
|Indian Overseas Bank||7.90%||7.85%||7.75%||7.50%|
|Karur Vysya Bank||8.85%||8.30%||8.15%||8.05%|
MCLR (marginal cost of funds based lending rate) is the lowest interest rate that a bank or lender can offer. Most banks cannot offer HOME LOAN interest rates lower than the marginal cost of funds based lending rate. However, certain exceptions can be made when allowed by the Reserve Bank of India (RBI).
The MCLR is a reference rate or internal benchmark for the financial institution. Marginal cost of funds based lending rate defines the process used to determine the minimum home loan rate of interest. The MCLR method was introduced in the Indian financial system by the Reserve Bank of India in the year 2016. The MCLR system has replaced the base rate system that was introduced in the year 2010. Thus, renewal of credit limits and sanctioning of loans is done as per MCLR norms.
MCLR is closely linked with the repo rate and fund costs of the banks. Thus, if there is a change in the repo rate, it will have an impact on your home loan’s floating rate of interest. If a bank brings down the marginal cost of funds based lending rate, the floating rate of interest associated with your home loan also comes down. This will not be affecting your equated monthly instalments but the tenure of the loan will get impacted.
In order to calculate the marginal cost of funds based lending rate, you must consider all the borrowing sources for a bank. A bank borrows from several sources including, fixed deposits, current accounts, savings accounts, etc. The rate of interest in these borrowing sources can be used by you for the calculation of marginal borrowing cost. You must understand that the source of a bank’s funds is not only borrowing, but also the equity (retained or infused earnings). Thus, return on equity can also be expected.
Bank Wise MCLR Rates
The formula prescribed by the Reserve Bank of India for calculation of MCLR is given below:
Marginal cost of funds = Marginal borrowing cost x 92% + return on the net worth x 8%
Banks must also maintain a cash reserve ratio of 4%. On this deposit, no interest is earned by the bank. Under MCLR, banks can avail some allowance called Negative Carry on CRR. Also, the operating costs must be considered and taken care of. There are several expenses of a bank that includes raising funds, opening branches, paying salary to its employees etc. These are not charged to the customers. Finally comes the discount or tenor premium. The reset period for the interest rate is called the tenor. It is directly proportional to the reset period i.e. the tenor is higher if the reset period is higher.
Thus, MCLR depends on
The decision to switch to MCLR from base rate depends majorly on the actual benefits and the transfer cost. Various banks charge differently for this switch. However, there are certain banks that allow you to convert home loan to MCLR without charging anything.
Example: Consider you have borrowed an amount of Rs.40 lakh as home loan and you intend to repay it over a tenure of 20 years. The base associated with your home loan stands at 9.95%. After a period of three years from the commencement of the loan tenure, you would have paid an amount of Rs.38,468 as your monthly instalments. You have also paid an interest amount of Rs.11,63,514. If you choose to continue on the same path with your base rate, you will be paying a total interest of Rs.52,32,428. However, if you choose you switch to MCLR for your home loan at 8.55% for the remaining tenure (17 years in this case), you will be paying an interest of Rs.34,00,396. This is the amount that you pay for 17 years. So, the total interest that you pay for your home loan is (Rs.11,63,514 + Rs.34,00,396) which comes up to Rs.45,63,910. It shows that you save a substantial amount of Rs.6,68,518 by switching to MCLR from base rate.
So, a spending a few thousand for converting to MCLR from base rate can reward you a hefty sum in the long run.
MCLR is associated with floating rate home loans only. In case the home loan that you opted for comes with fixed rates of interest, MCLR will not affect the home loan. Change in repo rate will decide whether you gain or lose with the MCLR. The home loan interest is following a downward trend currently. So, it can prove to be beneficial to switch to MCLR if you are planning to purchase a house.
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