The monetary policy committee of the Reserve Bank of India (RBI) cut the repo rate by 25 basis points (100 basis points is equal to 1 per cent) to 6.25 per cent on Tuesday. Following it, ICICI Bank has reduced its marginal cost of lending rate (MCLR) by five basis points today to 9.05 per cent.
This may be disappointing for many who were expecting their equated monthly instalments (EMIs) to go down substantially after the repo rate cut by the RBI.
Surya Bhatia, a New-Delhi based financial planner, says, "5 bps cut by ICICI Bank doesn't have too much impact on loans. RBI governor has been saying that banks need to match the rate cut. We need to wait and see how other banks react to the rate cut by RBI."
To give you an idea, on a 20-year home loan of Rs 1 crore, your EMIs will go down just by Rs 325 per month, factoring in the 5 basis points rate cut. Over the entire tenure of 20 years, the savings will be equivalent to around Rs 78,000.
Had the banks reduced the MCLR rates by 25 basis points, the EMI on a Rs 1 crore home loan would have come down by Rs 1,619 to Rs 90,617 per month from Rs 92,236 per month. Over the entire tenure of 20 years, it would have resulted into a savings of around Rs 3.9 lakh.
Moreover, experts say that EMIs of the existing borrowers may not go down immediately, while a new borrower can enjoy loans at the reduced rate. Adhil Shetty, Founder and CEO of BankBazaar, says, "The interest rate of the loan for the borrower is changed only on the reset period, which can be 6-12 months depending on the loan agreement between the bank and the borrower." So, if a reset date is six months from today, your loan rate will go down only after six months even if your bank reduces the MCLR rate today.
Currently, banks follow the marginal cost of lending rates mechanism to decide the interest rates on floating-rate loans while earlier it was decided on the basis of base rates. Under MCLR mechanism, banks lend on the basis of incremental cost of funds and the MCLR rates are reviewed on a monthly basis. This new rule came into effect in April this year. For those who borrowed before April 1, the interest rate will depend on the base rate of the banks. They can also shift to the MCLR mechanism by paying small fees.
Banks have been reluctant to pass on the benefit of rate cuts to consumers despite the RBI asking them time and again. Experts say we need to wait and see how other banks react to the rate cut by RBI. Kapil Wadhawan, CMD, DHFL says, "DHFL too intends to respond positively by passing on the benefits to the end borrowers. We look forward to a robust growth in the demand from retail home loan borrowers and expect the governments' initiatives on affordable housing to gain substantially from the lower interest rate regime."
Since January 2015, the RBI has reduced the repo rate by 175 basis points but banks have reduced interest rate by only 60-70 basis points. "While RBI has cut policy rates at regular intervals, banks have not followed suit by reducing them proportionately. Following this rate cut, it is critical for banks to reduce interest rates so that the benefits can be enjoyed by the end user," says Surendra Hiranandani, Founder and Managing Director, House of Hiranandani.