Loan borrowers all over the country are worried about the possibility of a hike in the marginal cost-based lending rates (MCLR) across banks. This predicts that loans ranging from personal to home loans are likely to become costlier. This occurred when 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, starting on 1st April 2018.
The MCLR rate system was first introduced 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, but it never happened.
All banks and financial institutions under the marginal cost-based lending rates (MCLR) mode are required to review and declare interest rates on a regular basis, typically after every month end. However, when it comes to home loans, the home loan interest rate in the MCLR based lending pattern will get re-priced periodically. As per the new RBI rules, the banks will have to specifically mention the periodicity of reset in every home loan contract they enter with the borrowers.
How will this Affect You?
While this move has been created to benefit the borrower, it may make loans costlier. If the base rate is combined with the MCLR both of them will coincide. 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 clear report comes out.
There are a lot of grievances about banks taking a long time to pass on the benefits of an RBI benchmark rate cut. Sometimes the borrowers never receive the full benefits. However, RBI’s recent move is believed to be a progressive step to address these issues. The new system is expected to completely eliminate the time lag and discrepancies associated with the base rate regime, and facilitate an instant reduction in the loan interest rates post-RBI repo rate cuts.
Since 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 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.
RBI has also authorized the banks to allow borrowers to move 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 until their loans mature. If they wish to switch over to MCLR based lending, banks will have to honor this request with immediate effect. Moreover, 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 were announced.