MCLR rate cut: How it impacts your loans

Mumbai: In the first week of this month, at least five top banks have cut their marginal cost of funds based lending rate (MCLR). If you are opting for a floating rate loan, MCLR is the benchmark rate to which you loan will be linked. Top banks including Kotak Mahindra Bank Ltd, Bank of Baroda, Punjab National Bank, Union Bank of India and Allahabad Bank have cut their MCLR in the range of 5-10 basis points (bps). One bps is one-hundredth of a percentage point. The move comes close to a month after the Reserve Bank of India (RBI) in a surprise move cut repo rate, the rate at which central bank lends to commercial bank, by 25 bps to 6.25%.

According to Narayan SA, president-group treasury and retail broking, Kotak Mahindra Bank Ltd, post the policy rate cut long-term rates are likely to come down. “It takes time for rate cut to get translated to the system for some time. Having said that, immediately after the rate cut there was a fall in the wholesale rate and some amount of fall in retail liability rate. Since MCLR is on marginal basis, it was taking into consideration based on the math that it can be passed on to the customer. Deposit rates have fallen marginally too. The rate cut which has happened and the market expecting another round of rate cut, this will get reflected on overall lending rate cut,” said Narayan. The bank revised its six-month and one-year MCLR by 5 bps to 8.80% from 8.85% and 9% from 9.05%, respectively. Kotak Mahindra Bank offers home loan on six month MCLR. Bank of Baroda and Punjab National Bank cut one-year MCLR by 10 bps, from 8.75% to 8.65% while Union Bank of India reduced its one-year MCLR from 8.55% to 8.45%. Last month, SBI, the country’s largest lender, reduced the spread on its home loan while left MCLR unchanged. Home loans usually have a benchmark rate and a spread, basically a margin over the benchmark.

How does it impact you?

If you are an existing home loan borrower, there will be no immediate impact of a cut in MCLR or spread. After MCLR came into effect in April 2016, the floating rate loans got fixed to the tenor of the MCLR. Hence, if your home loan MCLR is linked to six-month MCLR, your interest rate will get reset only after the completion of six months in case there is a change in the rate at the time of the reset. In case it is linked to one-year MCLR, the loan gets reset after a year. Again for existing home loan borrowers any change in spread will have no impact as the spread gets locked-in for the life time of the loan. If you are a new borrower, loans will be cheaper for you. Some banks give you loans on MCLR without spread. which can be an option to consider. Recently, State Bank of India, linked certain savings account and short term loans to repo rate. In case other banks follow suit, you will see further impact on your existing MCLR too, however marginally. A cut in MCLR also indicates that you can expect change in fixed deposit rates as well.