After a few hikes in marginal cost based funding rate (MCLR) by some banks in past two months, banks first raised the rates on bulk deposits.
Nikhil Walavalkar | Mar 01, 2018 01:13 PM IST | Source: Moneycontrol.com
The largest public sector bank in India – State Bank of India – has decided to increase the interest rate payable on retail deposits, followed by an increase in MCLR (marginal cost of funds-based lending rate) – the rate charged on loans – by up to 20 basis points. As the largest lender revises its interest rates, should you be worried with your financial plan?
Before getting into corrective measures and means to exploit the rate action, you should spend a minute understanding why rates have gone up.
“Towards the end of the financial year the liquidity in the market has gone down. The banks are keen to raise money. The rates are hiked as a lagged response to the rising bond yields,” said Mahendra Kumar Jajoo, head – fixed income, Mirae Asset Management.
For the uninitiated, the benchmark 10-year bond yield has moved up to 7.78 percent from a low of of 6.18 percent on December 7, 2016.
Banks typically take time to raise their fixed deposit rates. After a few hikes in MCLR by some banks in past two months, banks first raised the rates on bulk deposits. Now interest rates on retail fixed deposits are being hiked. This is a sign of relief for most fixed deposit investors who were forced to consider investing in the volatile stock markets through mutual funds.
Though the interest rate hike on fixed deposits is good news for conservative investors, one should not expect fireworks in the form of aggressive rate hikes in near future.
“As of now the liquidity tightening is the cause behind the fixed deposit rate hikes. RBI has maintained its neutral stance on the monetary issues. This may change to hawkish over next six months,” said Joydeep Sen, founder of wiseinvestor.in, a Mumbai-based wealth management firm.
Though the interest rates are set to go up and others are expected to follow SBI, the process of rate hikes will be gradual. “Bank fixed deposit investors may see higher rates over next six to twelve months. You can consider opting for six months to one year fixed deposits and rolling it over at higher rates when they mature,” Sen advised.
Rising interest rates, however, ring alarm bells for both bond fund investors and borrowers. The increase in yield suppresses the prices of bonds and thereby hurts investors in bond funds as net asset values of the bond funds go down. Recent spike in bond yields have taken a heavy toll on bond funds. Long term gilt funds lost 2.1 percent over past three months, on an average.
The prevalent bond yields are a result of the market discounting RBI’s hawkish stance one year down the line, according to experts. Although opinions are divided on the extent of a further surge in yields, there seems to be a consensus when it comes to volatility in the bond market.
If you are not comfortable with the volatility, you should stay away from long-term bond funds and income funds that invest in longer-term paper.
“Short term bond funds are good investment option at this juncture as they invest in bonds maturing in two to three years, where the yields are attractive,” said Jajoo. If you are comfortable with some amount of volatility and expect a sideways move in yields, you may consider investing in income funds and dynamic bond funds.
While fixed income investors see a mixed bag in the rising interest rate regime, borrowers, especially those on floating rate liabilities, are expected to see tough times ahead. The banking sector is undergoing a situation of extreme pressure on margins due to an increase in non-performing assets like never before.
The rise in yields and fixed deposit rates will ensure that banks will be forced to raise their MCLR. This will result in an increase in the floating rate for home loan borrowers. For example, if you have a Rs 50 lakh home loan for 15 years and the rate is hiked to 8.45 percent from 8.25 percent, then the EMI changes to Rs 49,090 from Rs 48,507, an increase of Rs 583. You may ascertain the possible impact on you using EMI calculator.
“Other banks will definitely follow the MCLR hike action of SBI. The rates on home loans may be hiked by the end of this month or in early April,” said Sukanya Kumar, founder of RetailLending.com.
Banks may postpone their rate hikes to attract home loan volumes and close the financial year with good numbers. But home loan borrowers should be prepared to pay higher EMIs in the near future.
Rates will be revised depending on the MCLR time frame. For example, if your home loan is linked to 6-month MCLR, you can expect rates to change after six months from the last reset. The 6-month MCLR prevalent at that time will be applicable to your home loan at the time of reset.
If interest rates continue their journey northward, cash flows do change for you. Account for them well in advance to ensure that you do not get caught off guard.
By Sangita Mehta | ET Bureau | Updated: Oct 31, 2017, 07.48 PM IST | Economic Times
MUMBAI: Country’s largest bank, State Bank of India (SBI), announced a 5 basis point cut in its benchmark lending rates across maturity, which first cut after 10 months.
The bank has pegged its benchmark rate to 7.95% for a term of one year with effect from November 1 against 8% year charged earlier. Most banks sharply reduced marginal cost of lending rates (MCLR) in January 2017, post demonetisation exercise after they saw huge inflow of deposits.
The reduction in the lending rates also comes within weeks of Rajnish Kumar, taking charge at the helm for a term of three years. The bank will now pegged MCLR to 7.70% for overnight borrowing and 8.10% for three years. Other largest banks like ICICI Bank and HDFC Bank too may announce a token cut in the lending rates.
The new rates will immediately benefit the new borrowers. However, the existing customers may have to wait for a while since under the MCLR system the interest rates charged to the customers is locked for a fixed term.
For home loans, the interest rates are fixed for a term of one year and thus the existing borrower will benefit at the end of the lock-in period.
For salaried women borrower seeking loan of less than Rs 30 lakhs, the bank will now charge 8.30% and for loans between Rs 30 lakhs and Rs 75 lakhs it will charge 8.40%.
For non-salaried women borrower seeking loan less than Rs 30 lakhs the bank will now charge 8.40% and for loans between Rs 30 lakhs and Rs 75 lakhs it will charge 8.50%. For all other borrowers, the bank charges 5 basis points more above the rates charged to women borrower.
The reduction in rates comes at a time when the Reserve Bank of India is revising the formula of pricing the loans. An RBI committee headed by Dr Janak Raj has suggested that interest rate on loans be pegged to external benchmark rates arrived at by market trading rather than leaving it at the discretion of each bank which appear to be coming up with some formula that would defy the best rates for most customers.
While announcing the monetary policy in October 4, the RBI had said, “Arbitrariness in calculating the base rate and MCLR and spreads charged over them has undermined the integrity of the interest rate setting process. The base rate and MCLR regime is also not in sync with global practices on pricing of bank loans.”
By Sunil Dhawan, ECONOMICTIMES.COM|Jun 20, 2017, 10.41 AM IST
The competition amongst home loan lenders is getting aggressive. Last month in May, several top lending institutions had reduced their home loan interest rates and are expected to lower them further, given the push to the housing needs in the country.
The drop in the home loan interest rate was in spite of the RBI holding on to the repo rate for the last few months.
The new option
In addition to lowering the home loan interest rates, few banks have started offering borrowers, the option to choose between 6-month reset period and 12-month reset period while taking the MCLR linked home loan.
Since April 1, 2016, when the MCLR was introduced, almost all the banks kept the reset period at 12 months. However, of late few banks have started offering the option to choose the reset period of 6 months in addition to the 12-months period. ICICI Bank has recently started giving the option to choose between 6 months and 12 months reset period. Axis Bank and Kotak Bank are the two other banks offering the 6-month reset period only.
How it matters
In a 12-month reset period home loan, if one takes a home loan in June 2017 and the RBI cuts repo rate in August 2017, even though banks MCLR comes down in the same month, the effect of it for the borrower will be seen in June 2018 only i.e. after 12 months.
In a 6-month reset period home loan, if one takes a home loan in June 2017 and the RBI cuts repo rate in August 2017, even though banks MCLR comes down in the same month, the effect of it for the borrower will be seen in December 2017 only i.e. after 6 months. For the borrower, the MCLR of the bank in December 2017 will be applicable.
In effect, there is a waiting period for the borrowers to see an impact on the EMI’s. Therefore, MCLR linked flexible home loans are sort of ‘fixed’ for a certain period of the loan.
How to choose
Choosing between the two might be a tricky issue and the answer to it may not be a straight forward one. It will boil down to the movement of the interest rate, both in the short-term and in the long-term. “If interest rates are falling, opt for a shorter reset period so that you can avail reduced rates sooner. In case the interest rates are rising, opt for a longer reset period so that your loan burden does not go up for a longer period,” says Navin Chandan , Chief Business Development Officer, BankBazaar.
Rather than looking at the shorter term movement, a long term trend could be of help to a prospective borrower. “In a scenario where a decrease in interest rates is foreseen, it might be better to opt for a shorter reset period,” informs Ranjit Punja, CEO & Co-Founder, Creditmantri.com.
Kotak Mahindra Bank since the beginning is offering the 6-month reset period loans. Sumit Bali, Sr. EVP & Head, Personal Assets, Kotak Mahindra Bank says, “At Kotak Mahindra Bank, home loan rates are linked to 6-month MCLR, thereby the rate offered changes every six months depending on the MCLR movement. Our current 6-month MCLR rate stands at 8.5%. Presently, we offer rates up to MCLR + nil spread.”
However, here is an important point not to be overlooked. “Yes, it’s a fact that home loan rates under 6-month MCLR will be revised and get reset in every six months compared to every year in 12-month MCLR, but the catch here is the markup to the MCLR, which actually adds to the effective lending rate, says Rishi Mehra, CEO, Wishfin.com.
According to Mehra, “You need not only to glance at both the MCLRs (Bank’s 6 and 12-month MCLR) but also the markup. Add the MCLR and markup in both 6-month and 12-month MCLR, and opt the one that has a lower lending rate on offer. For example, ICICI Bank offers a home loan of up to Rs 30 lakh at 6-month MCLR of 8.15% and 1-year MCLR of 8.20%. But the effective lending rate comes out to be equal in both the cases.”
Also, the quantum of loan matters. “Another factor to look at is the quantum of the loan up to which 6-month MCLR is applicable. In the case of ICICI Bank, 6-month MCLR is available for a loan of up to Rs 30 lakh only,” informs Mehra.
Can the reset period be changed
Bringing a change in the reset period may not always be an easy task. Better, if as a borrower, one gets clarity from the lender at the initial stages of taking a loan. “The reset period is typically pre-defined but it might be modified after a discussion with the lender,” informs Punja.
Can the markup change during the tenure
Let’s says, a customer takes a home loan at a certain markup. On the reset date ( after 6 or 12 months as the case may be), there is a possibility that the bank’s markup has changed. “The lenders can make changes in the markup, which gets influenced by the cost of funds to be borne by the banks. As these costs can vary from time to time, there would be changes in the markup accordingly,” says Mehra.
EMIs get reset periodically
In the base-rate era, when RBI reduced the policy rate, both the existing and the new borrowers, expected a fall in the rates with immediate effect. It’s a different story that banks delayed any such rate cut but were prompt in raising them whenever RBI increased the repo rate. There was, however, no reset period in the base rate era.
However, in the MCLR based lending, the interest rate of the home loan (and therefore the EMI’s) gets re-priced on a periodical basis. As per the RBI rules, “the periodicity of reset shall be one year or lower. The exact periodicity of reset shall form part of the terms of the loan contract.” Predicting the interest rate movement will be highly speculating in nature.
Refinancing a MCLR linked loan
In case, after few years of servicing the loan, one finds the interest rate or the markup too high or would like to switch to another reset period, refinancing the loan with another lender is an option. Mehra says, “Yes, you can switch the MCLR linked home loan to another bank at any time. The good thing is that you can do that without paying any foreclosure charges to the existing lender as it is a floating rate loan. However, you may have to pay a processing fee at 0.5%-1% on the transferred amount. A stamp duty at 0.20%-0.50% can also be charged by the lender.
The possibility of refinancing could, however, be remote. “With respect to changes in MCLR and reset period, on a case by case to basis, lenders might be willing to adjust your interest rates provided you have a healthy credit history. Higher the loan outstanding and better the credit history, the existing lender is likely to be flexible, and lower overall interest rates in order to retain the loan, rather than lose it to competition,” says Punja.
As far as choosing between 6 and 12 months reset period is concerned, look for flexibility and options while selecting and negotiating with the lender. “The offering of home loan on 6-month MCLR is a new phenomenon. So, you need to wait till you understand the pattern of rate offering under 6-month MCLR,” says Mehra.
Whatever reset period one chooses, it’s important to have a systematic partial prepayment plan in place to lower interest burden on the home loan. After all, the early you finish the home loan, higher will be one’s own equity in the house.