- Date : 14/06/2022
- Read: 5 mins
When the RBI raises the MCLR, it has an immediate impact on the EMI.
The RBI recently decided to increase the REPO rate, wherein the home loan banks were forced to increase their MCLR. The impact will hit EMIs when the effect sets in, and home loan EMIs will naturally increase.
What is MCLR?
MCLR stands for Marginal Cost of Funds-based Lending Rate. This is the lowest interest rate that a bank is authorised to offer to its clients by the RBI. MCLR was put into effect in 2016. What happened, as a result, is that the older base rate system applied by banks to their lenders was tweaked further. With MCLR, the impact of REPO rate changes by the RBI has a higher impact than the base rate system. Customers can opt for MCLR if the loan is dated prior to 2016. Currently, SBI has slated its MCLR @ 7.5% for loans beyond 3 years and more. This is after the REPO rate hike. This is likely to be changed in the next 2 months as per sources. Another hike is expected.
What is the REPO rate?
Also called the RE-Purchasing Option Rate, this is the rate at which the RBI buys suitable securities from commercial banks. In return for the securities, the RBI issues its loans to commercial banks. The banks in turn give loans to their customers. After the recent hike announced by the RBI on the 8th of June 2022, the REPO rate stands at 4.90%
What is the impact of the REPO rate on MCLR?
MCLR is based on a floating rate like earlier, but the advantage is that it takes the REPO rate into consideration as well. This is the major difference between MCLR and the previous base rate system. As a result, it has to calculate all the marginal costs of the bank, including the REPO rate and thus has a direct effect on the final rate charged by the bank to the borrower.
Why was the base rate done away with?
Previously, the base rate was an average of all the interest charges paid by the bank for its operations rather than the repo rate. As a result, very few differences were affected. The banks were never required to reveal the base rate and would only pass on the benefits to a few special clients. When MCLR took effect, this rather unfair system was abolished.
What changed the bank's attitude when MCLR was adopted?
Every customer would be informed about the REPO rate, and the bank would be required to pass on the benefit to the customers. But, as much as the customer wishes it, this never happens quickly. As a result, the RBI introduced the MCLR. Currently, SBI has an MCLR of 7.5%, while other private banks begin at 6%. This varies from bank to bank depending on the spread of the bank in question. This is after the RBI announced the hike on 8th, June 2022.
How does the REPO rate affect the interest rates charged by the banks?
The REPO rate has been increased by 50 basis points to 4.90%, and it is only a matter of time before the “Reset Date” sets in. As a result of this increase, we will see a rise in EMIs, which is unusual. It is done when the RBI wants to control inflation in the country and keep it low. This would hike the rate of interest on home loans, personal loans, and car loans going forward. Currently, India is going through an extreme phase of high inflation. SBI has increased home loan EMIs to 8%.
What does the RBI do to curb inflation in the economy?
The money collected by the RBI following the hike would be used for infrastructure development and basic necessities. This, in turn, would provide much-needed relief to the poor people who are affected by the high cost of basic commodities such as fruits, vegetables, and gas cylinders. The poor would also be engaged in labour for building roads, etc. as more money would flow into their hands. Inflation will be stabilised over time.
How the revision of the REPO rate by RBI has affected the Home Loan Interest rates & subsequent EMI?
The RBI's 90 basis point increase over a two months frame has revised the REPO rate from 4.00% to 4.90% and increased the interest on home loans and subsequent EMI to 8%. For example, in the case of the Bank of Baroda, the REPO rate of 4.90% + 2.6% hike in interest rate by the bank equals 7.5%. This is for a 30-year loan with a maximum loan amount of 10 crores.
Factors Affecting MCLR
- The marginal cost of the fund-based lending rate is the most important component. Savings account return rates, term deposit rates, the REPO rate of the RBI, and various other deposits all have an impact on MCLR.
- Under MCLR, the RBI doesn’t pay any interest on the Cash Reserve Ratio (CRR) that banks maintain with the RBI.
- The operational costs of the bank are taken into consideration.
- The RBI allows a higher rate of interest for long-term loans for all banks. Here, the EMIs could be stretched to offset the burden.
What loans are included in MCLR?
- Home loans
- Loans against property
- Corporate loans
What loans are out of the MCLR ambit?
Governments give out loans to the poor at fixed rates.
Those who have opted for fixed rates on home loans, car loans, and personal loans.
Housing finance companies give out loans at fixed rates.
Read Also: 6 ways to reduce home loan EMIs
MCLR demands a little in-depth research, but in general, MCLR is a good option for paying EMIs. This, however, varies depending on the situation. At the moment, we can expect an increase in EMIs on home loans as a result of the RBI’s revision and a hike again expected in the next few months.