The Reserve Bank of India today cut the repo rate by 0.25%, bringing it down to 6.25%. The repo rate is the rate at which the RBI lends money to commercial banks. The central bank calibrates the repo rate to manage the supply of money in the economy, and a lower rate helps increase the supply for money. Repo rate calibration is aimed at managing inflation. With inflation remaining benign after a brief spell of oil price-fuelled volatility in 2018, the RBI decided it was time for the first repo rate reduction since August 2017.
Any reduction of the repo rate will bring cheer to borrowers as the RBI-mandated rate cuts get transmitted to their loans such as home loans, car loans and personal loans. Women especially will welcome this rate cut. So will millennials and loan seekers from non-metros, whom we ve seen hungry to fulfill their aspirations.
On Average, Women take more loans than Men
In 2018, the average home loan ticket size where women were the primary borrowers was Rs 27.57 lakh. This was 20% higher than the average home loan ticket size for men in the same period, standing at Rs 22.97 lakh. Home owning was a male bastion for millennia. But the modern Indian woman is bucking tradition. She aspires to attain financial independence which includes having a roof over her head. A similar trend was observed in the disbursement of PM Mudra Yojana loans of Rs 10 lakh or less provided to non-farm micro and small enterprises. Finance Minister Piyush Goyal announced in his interim budget speech that 70% of the loan beneficiaries were women.
Interest Rates Lower For Women
Typically the best interest rates are reserved for women. For example, SBI provides a home loan of up to Rs 30 lakh at an interest rate of 8.75% at a loan-to-value ratio of up to 80%. The same loan for other borrowers is priced at 8.80%. SBI s auto loan for women too is priced 5 basis points lower than the rate for men. Because of this, women can afford to borrow more than men. Think more square footage in your home, or premium features for your car.
Non-Metros Will Welcome Rate Cut
We have also seen that on average, borrowers from non-metros are taking bigger loans than those in metros. In 2018, we saw that the average personal loan ticket size from metros was Rs. 2.55 lakh whereas it was around 10% higher for non-metros at Rs. 2.80 lakh. Lower interest rates encourage borrowing, and young borrowers from small towns will welcome a rate reduction.
External Benchmarking Will Stir Loan Market
So far, banks have been allowed to set internal benchmarks such as their MCLR. These benchmarks are the lowest rates at which they will lend. For example, the SBI has a one-year MCLR of 8.55%. Come April, banks will shift to an external benchmark as mandated by the RBI. These external benchmarks could be the repo rate or the yield of the 91-day or 182-day Government Treasury Bills. This move is meant to ensure that RBI-mandated rate cuts such as the one that happened today get fully transmitted to the common banks.
Good Time To Buy Home
The rate reduction, the move to external benchmarks, the extension of PMAY benefits for one more year, and the sops for home owners announced in the interim budget mean that this is a good time to buy property not just for women and first-time owners but also for those looking to get a second home. 2019 is already shaping to be an exciting year for the financial markets.
(The writer is CEO, BankBazaar.com)