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Feb 7, 2018

Home Loan Borrowers will get Happy Surprise from April 1

Good news for home loan borrowers. The Reserve Bank of India (RBI), in a surprise move, has decided to link the base rate to the MCLR (Marginal Cost of Funds based Lending Rates) with effect from April 1, 2018, in a bid to harmonize the methodology of determining benchmark rates.

It may be noted that the RBI had introduced the MCLR system with effect from April 1, 2016 because of the limitations of the base rate regime. With the introduction of the new system, it was expected that the existing base rate-linked credit exposures will also migrate to the MCLR system. However, the RBI observed that a large proportion of bank loans still continues to be linked to the base rate despite the apex bank highlighting this concern in its earlier monetary policy statements.

“Since MCLR is more sensitive to policy rate signals, it has been decided to harmonize the methodology of determining benchmark rates by linking the Base Rate to the MCLR with effect from April 1, 2018,” the RBI said in a statement today.

Although necessary instructions on this new system will be issued by the RBI by the end of next week, however, experts say that this move is clearly aimed at benefiting the home loan borrowers who are still on the base rate. That is because once the base rate is linked to the MCLR system, then the former will move in tandem with the latter without any action on the part of borrowers on the base rate.

Financial experts say that historically bankers have been very slow to pass on the benefits of reduced cost of funds to the borrowers. “Hence the MCLR system, which links the base rate to the cost of funds, was introduced by the RBI. Now by making it imperative for bankers to link home loan base rates with MCLR, the RBI is extending these benefits to the home loan borrowers. Now really this move will be beneficial when interest rates are moving downwards, which is not likely to happen anytime soon. However in the long run, it will still be beneficial to home loan borrowers as they will not have to wait long before getting benefits of interest rate reductions by the RBI,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.

This linking, in fact, will solve two concerns of the RBI. In the first place, it will shift loans to a more responsive system of benchmarking interest rates and enable a smother transfer of policy rate cuts. Second, all loans would follow a single pattern of benchmarking, bringing about greater uniformity.

“While the exact details of this harmonization are yet to be revealed, currently it appears that once base rate is linked to MCLR, the base rate would vary in tandem with the MCLR. For customers on the base rate system, this is welcome news as the transition to MCLR has the potential to reduce interest rates by as much as 70 basis points. This can mean significant cost savings, especially if the loan is less than 5-year old. For instance, if you borrowed a loan of Rs 50 lakh for 20 years 4 years back, a 70 bps reduction would mean savings of more than Rs 3.6 lakh,” informs Adhil Shetty, CEO, Bankbazaar.com.

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