Soon after the Reserve Bank of India recently slashed its repo rate for the fifth time in a row, the nation’s largest bank-the State Bank of India-on Wednesday announced reduction in its MCLR by 10 bps across all tenors. With this, the bank’s one-year MCLR (Marginal Cost of Funds based Lending Rate) has come down to 8.05% per annum from 8.15% p.a. with effect from October 10, 2019, while the three-year MCLR has come down to 8.25% from 8.35% earlier. It may be noted that this is the sixth consecutive rate cut by SBI in FY 2019-20.
SBI, however, is not the only leading bank which has slashed its lending rates recently. Some other banks-including HDFC Bank and ICICI Bank-have also made their home loans, car loans, personal loans and other loans cheaper recently in view of the consecutive rate cuts by the RBI, adequate liquidity in the system as well as to lure customers and cash in on the festive fervour.
According to a Kotak Bank study, fresh lending rates have declined marginally by 10 bps MoM in August 2019 to 9.7%. Fresh lending rates of public sector banks declined 10 bps MoM to 9.2% while private bank rates were down 15 bps MoM to 10.2%. Lending rates on outstanding loans were up 10 bps YoY at 10.5%. "MCLR rates started to decline for private banks over the past two months while PSU banks have seen sharper declines of ~20 bps since May 2019. Lending rates are likely to see declines going forward with most banks having cut MCLR rates by ~10-20 bps in the past one month and with the introduction of external-benchmark-linked loans," the report states.
It is clear, thus, although there hasn’t been a significant reduction in the banks’ lending rates, various types of loans have definitely become cheaper in recent months and, therefore, it may surely be the right time to take a home loan or auto loan, if you are looking for one.
Impact of the Repo rate cut on Home Loan and Car Loan borrowers:
Talking about the rate cut by SBI, industry experts say that rate reductions are always welcome, especially during an economic slowdown like this. Less than a week following RBI's repo rate cut of 25 basis points, the SBI has passed only 10 basis points to its customers with MCLR-linked loans.
"Customers, however, can expect further cuts as the RBI has hinted at further repo rate reductions as may be required to address slowing growth. Apart from the MCLR-linked loans, we now also have repo-linked loans. SBI's cheapest home loan rate at the moment is 8.20%. However, the minimum rate reset period in this loan is three months. This means that customers expecting the repo rate cut to be passed on to them will have to wait for three months. New loan seekers, however, are advised to consider repo-linked loans because of the effective rate transmission," says Adhil Shetty, CEO, BankBazaar.com.
Industry experts say that with the RBI reducing the repo rate for the fifth consecutive time this year, and banks mandated to link all new floating rate retail loans to an external benchmark with effect from October 1, there is a wave of optimism amongst the prospective borrowers that loans have become significantly cheaper. The ongoing festive season has also provided added impetus for borrowers to avail loans, as most banks extend offers such as lower interest rates, waiver and/or lower processing fee etc. to lure borrowers.
"While linking of loan rates to an external benchmark is introduced to ensure quicker transmission of changes in policy rates or broader market rate changes to borrowers, banks are still free to decide the spread they wish to levy on the external benchmark. To arrive at the effective interest rate, banks also factor in the spread and credit risk premium over the external benchmark. The narrower the spread, the lower would be the interest rate charged. Hence, borrowers should take this into consideration while comparing interest rates. Apart from this, it is prudent to compare various loan offers in terms of the processing fees, loan tenure, prepayment charges etc. before zeroing in on any lender for your home loan or car loan. Consider visiting online financial marketplace to get the best loan offers available on your credit score, monthly income and other eligibility factors," advises Ratan Chaudhary, Head of Home Loans, Paisabazaar.com.