Your EMIs will now get more expensive as major banks have increased their lending rates recently. Let’s find out what this means for the average consumer.
The recent Punjab National Bank scam that cost the bank Rs. 11,400 crores ($1.77B) brought the Indian public sector banking sector under tremendous scrutiny. It dented the credibility of public sector banks that are still recovering from the losses incurred on their Non-Performing Assets (NPA). The magnitude of the PNB scam also opened a can of worms, questioning the internal system of checks and balances that exist within these banks.
Another recent development relating to the banking sector that might raise concerns among the average consumer is the hiking of lending rates by major banks. Indicating a change in rate cycle, banks have increased their interest rates for the first time in two years.
Additional reading: Understanding the PNB Scam
SBI hikes one year lending rate, ICICI and PNB follow suit.
The country’s largest lender, State Bank of India raised the key one-year Marginal Cost of funds based Lending Rate (MCLR) by 20 basis points to 8.15% from 7.95%. This will come into effect from March 1, 2018. Following suit, Punjab National Bank (PNB) and ICICI Bank also hiked the MCLR rates for loan borrowers. The country’s largest private sector bank, ICICI Bank raised its one-year MCLR rates to 8.30% from 8.20%, an increase of 10 basis points.
At the centre of the Nirav Modi fraud, Punjab National Bank (PNB) also raised its lending rate, effective March 1, 2018. It raised its one-year MCLR by 15 basis points to 8.30% from 8.15%.
The increase in rates comes a day after SBI raised interest rates on term deposits by 10-75 basis points.
To grasp the impact of this development better, it’s important to first understand what MCLR is.
What is MCLR?
MCLR or the Marginal Cost of funds based Lending Rate (MCLR) refers to the minimum interest rate of a bank below which it cannot lend, except in some cases allowed by the RBI. It is an internal benchmark or reference rate for the bank. A basis point is one-hundredth of a percentage point. After the MCLR system came into effect in April 2016, this is the first time banks have increased the benchmark lending rate. This signals a turn in the interest rate cycle.
MCLR is argued to be a responsive and transparent interest rate system where the intervals of automatic interest rate resets are pre-defined in the loan agreement. The new lending rate system is applicable on Home Loans, Car Loans, Education Loans and Personal Loans taken after April 2016. All loans sanctioned after April 1, 2016 are priced with reference to the MCLR.
Additional reading: MCLR Lending Rates Make Home Loans Cheap: Here Is What This Means For You
What does this mean for you?
Most banks link lending rates for retail customers in categories such as Home Loans, Personal Loans, and Car Loans to the one-year MCLR. However, some banks, including ICICI Bank and Kotak Mahindra Bank have linked Home Loans to six-month MCLR. ICICI Bank has also hiked its six-month MCLR by 10 basis points from 8.15% to 8.25%.
As explained earlier, post April 1, 2016, all bank loans including Home Loans are now linked to the bank’s MCLR. Earlier, they were linked to the bank’s base rate.
Banks publish overnight, one month, three months, six months, one year, two years, three years MCLR rates each month. If the loan is linked to the bank’s 12-month MCLR, the next change will happen after 12 months.
Following the changes in MCLR rates, existing borrowers on MCLR-linked loans will not see the impact as per their reset clause. For instance, for a Home Loan taken on November 2017 linked to one-year MCLR, new rates will kick in only a year later in November 2018. For new borrowers, loans will get immediately expensive. Most banks have a spread, basically a mark-up, on Home Loans and other consumer loans.
Financial experts believe that the hike in lending rates is owing to an increase in the cost of funds. Banks have increased the cost of deposit, hence, they want to pass on the cost in MCLR.
Don’t let this development, however, sink your hopes of buying a home or car. These are probably some of the more expensive investments you will make in your life. So, clarify doubts about MCLR rates and any other crucial details with your bank before coming to a decision. At BankBazaar, we understand the importance of such an investment for you. We therefore try to bring to you the best rates on Home Loans, Car Loans and Personal Loans.