Business PTI | Apr, 03 2017 18:53:46 IST | Firtspost.com
New Delhi – Ahead of the RBI monetary policy this week, the country’s largest bank SBI has reduced benchmark lending rate by 0.15 percent to 9.10 percent, a move that will lower EMIs for borrowers.
Base rate or the minimum lending rate of the bank has been reduced from 9.25 percent to 9.10 percent effective April 1. The bank has also reduced its base rate by 0.05 percent to 9.25 percent.
Similarly, benchmark prime lending rate (BPLR) has also been reduced by similar percentage points to 13.85 percent from 14 percent.
With the reduction, EMIs for the new as well as existing borrowers who have taken housing and car loans at base rate will come down by at least 0.15 percent.
The new rate is effective from the date the bank merged five of its associates and Bharatiya Mahila Bank putting it on the list of top 50 large banks of the world.
The total customer base of the bank has reached 37 crore with a branch network of around 24,000 and nearly 59,000 ATMs across the country.
The merged entity has a deposit base of more than Rs 26 lakh crore and advances of Rs 18.50 lakh crore. It is to be noted that the SBI has made changes in signage and logo, with its iconic keyhole set against the background of inky blue.
There have been minor changes in the design and colour of SBI’s new look from April 1.
The background to the SBI signboard has been changed from white to inky blue while the SBI logo or the monogram is a few shades lighter than the existing blue.
By Narendra Nathan, ET Bureau| Mar 20, 2017, 04.06 PM IST | Economic Times
Just like bank depositors, those borrowing from banks also need to be alert in order to protect themselves against unnecessary charges. Given below are the most common areas where banks tend to overcharge customers.
If you compare the interest costs of your friends and relatives on bank loans—housing, auto, personal loan, etc.—you will realise that they vary drastically. And these costs not only vary across banks, but across customers of the same bank—and not because of varying customer credit scores. Some banks have been offering loans at cheaper rates to new customers, while charging old customers a higher rate. “Banks continue to follow the discriminatory practice of offering differential rates for existing and new customers and this should stop,” says Ramganesh Iyer, Co-founder, Fisdom.
As the banking regulator, the Reserve Bank of India (RBI) should stop this discriminatory practice, which it is partly responsible for creating. The RBI introduced the MCLR (marginal cost based lending rate) method, effective April 2016, to enable a faster transmission of rate cuts to bank customers, replacing the base rate method that was being used by banks to set their lending rates—earlier the base rate had replaced the less transparent prime lending rate (PLR). Now, borrowers who took loans 4-5 years back, and did not ask their bank to switch to the newer regime, are still linked to the PLR. Those who borrowed when the base rate became the benchmark are stuck with the base rate. Now, while banks are giving new loans at cheaper rates, based on MCLR, old customers are still paying higher rates.
“Since banks offer different rates, it is better to visit some common aggregator and understand the lowest rates available in the market. This will help you bargain better with your bank,” says Dipak Samanta, CEO, iServeFinancial.
To reduce your interest outgo, you need to shift your loan from base rate or PLR to MCLR. Shifting to MCLR now is a good move, say experts. “Though RBI’s stand is neutral now, rates may not go up from current levels. In fact, they may come down later—after an year,” says Balwant Jain, investment expert. Bear in mind though, in an upward moving interest rate regime, MCLR will move up faster than base rates, just like it falls faster in a reducing interest rate regime.
Loan reset charges
There are two types of loans: Fixed and floating rate. Floating rate loans are supposed to mirror the rise and fall in interest rates set by the RBI. But this rarely happens. While banks increase rates immediately, they are very slow in cutting them. The introduction of new benchmarks has also turned out to banks’ advantage. They charge customers for shifting from one benchmark to another— from PLR regime to base rate regime to MCLR regime now. The charges are levied to meet the expenses involved in drafting and registering new agreements—stamp duty, registration charges, etc. Though these expenses vary across states, ordinarily they won’t be more than 0.2% of the outstanding amount. However, some banks try to profit from this also by charging around 0.5%.
Should you go for a reset even if it involves a small charge? Yes. The amount you save will be significantly higher over the years. To illustrate, consider the case of a home loan borrower with Rs 50 lakh outstanding loan amount and a 15-year tenure. A 1% fall in interest— from 9.5% to 8.5%—will bring his EMI from down from Rs 52,200 to Rs 49,250, a reduction of Rs 2,950 per month. A total saving of Rs 5.31 lakh—significantly higher than the reset fee of Rs 25,000 even at the maximum rate of 0.5%. You may be able to get this reset cost down by negotiating with your bank. A threat of shifting to another bank often works. “Another way is to approach the branch manager. Based on the value of your relationship, they can reduce or even waive charges,” says Samanta. The ‘value of relationship’ here is crucial. If you have multiple relationships with the bank—savings bank account, credit card, other loans, investment, etc.—you have a valuable relationship and will receive a favourable treatment.
Source : https://goo.gl/FBRCpI
When banks cut MCLR, they usually do it for all the five MCLR baskets
Vivina Vishwanathan | Tue, Oct 11 2016. 04 35 PM IST | LiveMint
After the Reserve Bank of India cut repo rate by 25 basis points (bps), some banks such as Indian Bank and Canara Bank Ltd cut their marginal cost of funds based lending rate (MCLR) and their base rate. State Bank of India Ltd (SBI), the country’s largest lender, had cut its MCLR before the monetary policy announcement. MCLR is the new benchmark lending rate at which banks lend to new borrowers. The existing borrowers are still on base rate and have the option to switch to MCLR. Currently, MCLR is 5-10 bps lower than base rate. One basis point is one-hundredth of a percentage point.
When banks cut MCLR, they usually do it for all the five MCLR baskets. For instance, when ICICI Bank reduced its MCLR by 5 bps, its overnight MCLR and 1-month MCLR came down to 8.85% each, the 3-month MCLR to 8.95%, 6-month MCLR to 9.00% and 1-year MCLR to 9.05%.
Out of the five MCLRs that banks publish on their websites, it is either the 6-month or the 1-year MCLR that is used as the benchmark rate for new home loan borrowers. For instance, SBI has benchmarked its home loan to 1-year MCLR, whereas Kotak Mahindra Bank Ltd has linked it to 6-month MCLR. Kotak Mahindra Bank’s 6-month MCLR is 9.20% and SBI’s 1-year MCLR is 9.05%. This also means there will be a reset clause in the loan document, which is linked to the tenure of the MCLR your home loan is linked to. In case of SBI it will be 1-year and for Kotak Mahindra Bank it will be 6 months.
Things to remember
All MCLR-linked loans come with a spread, which is the margin that you have to pay above the MCLR. For instance, ICICI Bank offers 1-year MCLR at 9.05%. For a home loan of up to Rs5 crore, the spread is 25 bps, which means your home loan interest rate will be 9.30%. For home loans above Rs5 crore, the spread is 50 bps above the 1-year MCLR.
Usually the spread is higher for larger loans.
Harsh Roongta | Apr 10, 2016 10:06 PM IST | Business Standard
The marginal cost-based lending rate or MCLR that has kicked in from April 1 replaces the base rate system that was introduced with much fanfare six years ago.
In theory, MCLR is fairly straightforward. The bank declares its MCLR every month, the benchmark rate, based on the latest interest rate it pays on deposits in that month, with a couple of additional items.
Borrowers are charged a little above this rate as the bank will charge a ‘spread’. This will be pre-fixed at the time of giving the loan and cannot be changed easily. In theory, once the bank reduces its deposit rates, the MCLR will come down and since the ‘spread’ is pre-fixed, so will the interest rate for borrowers.
But, there are issues. For one, unlike the base rate, there will be a multitude of rates such as overnight, monthly, quarterly, six-monthly and yearly. Banks are free to have more such rates. Each of these rates will be announced every month by each bank.
Then, apart from the deposit rate, there are a whole host of subjective factors applicable in each calculation and there can well be a situation where these multiple rates move in opposite directions. That is, the monthly rate might be down but the annual rate goes up.
Also, the applicability of the reset date has been left to the discretion of the banks. So, State Bank of India (SBI) and ICICI Bank have chosen to go for a yearly reset of interest rates for home loans, whereas Kotak Mahindra Bank has chosen a six-month reset and some other banks have chosen quarterly resets. The implications of this difference in reset periods will only be known in the future. In the current context, it implies that even if SBI drops MCLR in May, the home loan borrower will get the benefit only after one year.
In addition, the MCLR system does not apply to housing finance companies such as Housing Development Finance Corporation and LIC Housing and other finance companies as well as non-banking finance companies. And, if you want to shift to the new mechanism, you may have to pay a fee.
The good thing: Both floating and fixed rates are clearly defined – an excellent move.
Based on these, let’s make some predictions:
- Three to seven year loans like car loans and personal loans, currently given on a floating rate basis by public sector banks (most private banks are already providing these on a fixed-rate basis), will shift to a fixed rate regime. This will help banks charge a prepayment penalty. It is also possible that banks may stop offering the floating rate option for such loans or make it more expensive.
- Even in the home loans segment, we shall see many hybrid loans where the initial period will be a fixed rate for at least three years, to enable the banks to charge a stiff prepayment penalty in the event that the consumer wants to prepay or shift his loan during this period. However, these types of loans have never been popular with the borrowers.
- Quite a few banks are going to keep the reset clause at 12 months from the date of disbursement. That will enable them to deny the benefit of the lower rate to the borrowers for at least a year. This is a double-edged weapon as in the future, this will also prevent banks from increasing the rates for a year despite an intermediate increase in interest rates. Maybe, at that time, they will change the reset period for new consumers. Of course, nothing but inertia prevents the consumer from shifting his loan without a prepayment penalty, even within the year.
For new borrowers, home loan rates will be automatically reset either yearly or every six months
Vivina Vishwanathan | Last Modified: Mon, Apr 04 2016. 10 30 PM IST | LiveMint
State Bank of India (SBI), India’s largest lender, was the first to announce the new marginal cost-based lending rate (MCLR), on 1 April 2016. This is the new benchmark lending rate and it replaces the base rate for new borrowers. SBI has introduced seven MCLRs for periods ranging between overnight and three years. While MCLR will be the benchmark rate for new borrowers, for existing borrowers, the base rate regime will continue.
Here’s what the new rate means, and how it affects you.
What is MCLR?
MCLR is the new benchmark lending rate at which banks will now lend to new borrowers. Till 31 March 2016, banks used the base rate as the benchmark rate to lend.
MCLR is built on four components—marginal cost of funds, negative carry on account of cash reserve ratio (CRR), operating costs and tenor premium.
Marginal cost of funds is the marginal cost of borrowing and return on net worth for banks. The operating cost includes cost of providing the loan product including cost of raising funds. Tenor premium arises from loan commitments with longer tenors. According to brokerage and investment group CLSA, the source of funding for a bank is based on actual domestic funding mix. MCLR is closely linked to the actual deposit rates.
“If one-year term deposit is at 7.50%. Then one-year MCLR will be 7.50% plus CRR, operation cost and tenor premium,” said Ashutosh Khajuria, executive director, Federal Bank Ltd.
The Reserve Bank of India (RBI) has asked banks to set at least five MCLR rates—overnight, one month, three month, six month and one year. Besides these, banks are free to set rates for longer durations as well. The rates have to be reviewed on a monthly basis, but banks that don’t have the capacity to do monthly reviews on can do so quarterly till March 2017.
MCLR-linked loans will be reset for a maximum of one year. So, you will have a new interest rate on your home loan at a pre-decided time and for a maximum period of one year.
Banks are also allowed to determine a spread that is higher than MCLR. Depending on your credit profile, banks will decide this. “The spread will be decided based on credit risk and tenor. For credit risk, in case of an individual borrower, we will look at Cibil rating. Depending on the credit worthiness of the customer, we will set the spread above MCLR. Currently, the spread is in the range of 25-60 basis points (bps) for home loans,” K.V.S. Manian, president-corporate, institutional and investment banking, Kotak Mahindra Bank Ltd. One basis point is one-hundredth of a percentage point.
Not all loans will come under this rate. For instance, loans covered by government schemes where banks have to charge interest rates as per the scheme are exempted from being linked to MCLR as the benchmark for determining interest rate.
How does it work?
If you plan to take a floating rate home loan, your loan will now be linked to MCLR. Most banks have announced five to seven rates. For home loans, banks will either use the six-month MCLR or the one-year MCLR as the benchmark rate. Therefore, from now, all floating rate loan agreements will have a reset clause at a pre-specified interval. “Banks can decide on the tenor that they want to use to reset for longer-term loans such as home loans. We have decided to reset home loan interest rates at a six-month frequency. Hence, the six-month MCLR will be applicable for home loans,” said Manian. Kotak Mahindra Bank has announced 9.40% as its six-month MCLR and the home loan will be reset every six months in case of any changes in MCLR. If you have a home loan, the bank will reset the rate automatically at a pre-specified date.
However, banks such as SBI and ICICI Bank Ltd have set one-year MCLR as the benchmark for home loans. For instance, for salaried individuals, ICICI Bank has set a floating rate home loan at one-year MCLR of 9.20% with a spread of 25 bps for loans of up to Rs.5 crore. So, the interest rate will be 9.45%. The bank’s website stated that this will be valid till 30 April 2016. Though the MCLR is reviewed monthly, your home loan will be reset every year automatically, depending on the agreement with the bank. For instance, if you take a Rs.30-lakh loan on 1 April this year, one-year MCLR is at 9.20% and spread on it is 25 bps, your home loan will be 9.45%. You will pay instalments at this rate for the next one year. If on 1 April 2017, one-year MCLR gets revised to 9.15%, your home loan interest rate will get reset at 9.40% (MCLR of 9.15% plus spread of 25 bps). Accordingly, your instalment or loan tenor may change.
According to a report by Ambit Capital Pvt. Ltd, RBI gave banks the provision of a reset period to partly smoothen the impact of changing rates on banks’ margins (as deposits re-price with a lag, reset periods allow bank to adjust the timing of loan pricing). As the concept of reset period contravenes with the RBI’s objective of quick transmission of monetary policy, the RBI has capped reset period at one year.
Though retail loans are likely to be set at six months to one-year MCLR tenors, corporate loans may be set at shorter tenors. “Due to complexity in the retail product, a pre-specified reset has been decided. When it comes to corporate loans, there is a possibility to negotiate across the multiple sets of rates that are available,” said Manian.
Can an existing borrower who is on a base rate regime move to MCLR? According to RBI, existing loans and credit limits linked to base rate will continue till repayment or renewal, and banks will have to continue publishing base rates as well. Existing borrowers can move to MCLR-linked loans at mutually acceptable terms and these loans will not be treated as foreclosure of existing facility.
What you should know
The MCLR-linked home loan rate is currently marginally lower than a base rate-linked loan. For instance, SBI was offering home loans between 9.50% and 9.55% till 31 March. From 1 April, the rate is lower by 10 bps and ranges between 9.40% and 9.45%.
According to the Ambit report, new MCLRs are not so different from base rates: “…even if benchmark rates would have fallen, the effective loan pricing for borrowers might not have changed much. This is because banks could change spreads over benchmark rates,” the report noted.
Home loan rates will now depend on the bank’s choice of reset period—six-month or one-year MCLR rate and spread rather than one common base rate and spread. According to a Centrum Broking Ltd report, while MCLR is intended to ensure effective policy transmission, past studies, including references to global banks, suggest limited rate transmission to end-user. Hence, its effectiveness in the longer run will need to be assessed, the report noted.
Existing borrowers should wait for the new system of calculation to settle before deciding to switch loans.
Source : http://goo.gl/ljh3NV
The new rate setting structure, which asks banks to price loans based on the marginal cost of deposits rather than average cost, comes into effect from 1 April
Aparna Iyer | Last Modified: Thu, Mar 31 2016. 11 12 AM IST | LiveMint
Mumbai: State Bank of India (SBI), the country’s largest lender, on Thursday announced its marginal cost of funds-based lending rate (MCLR). The new rate setting structure, which asks banks to price loans based on the marginal cost of deposits rather than average cost, comes into effect from 1 April.
At SBI, the MCLR for loans upto one year maturity will be lower than its current base rate of 9.30% while those on two year and above maturity will be marginally above its base rate.
According to the statement on the bank’s website, the MCLR for overnight loans will be 8.95%, for one-month at 9.05% and for three-month at 9.10%.
The MCLR on 6-month loans will be 9.15% and for one year loans the rate would be 9.2%, the bank said.
Further the bank’s MCLR for two year loans would be at 9.3%. Loans with three year maturity would carry an MCLR of 9.35%, the bank said.
To be sure, the bank will add the credit risk premium of individual borrowers to the MCLR for the final loan rate it would charge.The rates take effect from Friday onwards.
The Reserve Bank Of India introduced the MCLR on 17 December, and the guidelines mandated that banks must price incremental loans using MCLR.
Under MCLR, banks will need to consider their marginal cost of funds, or the cost incurred on incremental deposits across different maturities. To this, banks will add their operating costs, the negative carry over of their cash reserve ratio (CRR) balances with the central bank and a tenure premium.
Banks will need to publish MCLRs for at least five tenures of loans which include overnight, three months, six months and one year. The final loan rate for a borrower will be arrived at by adding the credit risk premium to the MCLR.
The MCLR is expected to improve transmission of policy rate cuts to bank loan rates.
Source : http://goo.gl/yHkRjs
Aparna Iyer & Vishwanath Nair | Last Modified: Fri, Dec 18 2015. 12 35 AM IST | LiveMint.com
RBI aims to make rates responsive to policy changes; change may make loans cheaper for new borrowers
Mumbai: Indian banks will soon have to price their loans based on rules announced by the central bank on Thursday in a move that is aimed at making lending rates more responsive to policy rate changes.
Starting 1 April, lenders will calculate their lending rates based on the marginal cost of funds, or the rate offered on new deposits. The new rules will likely to make loans cheaper for new borrowers. For existing borrowers, it may take as much as a year for the benefits to be transmitted.
Banks currently set their lending rates based on the average cost of funds on deposits outstanding.
Reserve Bank of India (RBI) governor Raghuram Rajan has repeatedly emphasized the need for banks to pass on interest rate cuts, saying less than half had been passed on to consumers this year.
While RBI has cut its benchmark rate by 125 basis points in 2015, lending rates have come down only by 60 basis points, RBI said in its December monetary policy review. One basis point is one-hundredth of a percentage point.
“While these guidelines will benefit new customers, existing customers will also have an option to shift to the new regime with some conditions,” Arundhati Bhattacharya, chairman of the nation’s largest lender State Bank of India, said in an emailed statement. “Sufficient time has been given to banks to switch over to the new regime of marginal cost of funds-based lending rate.”
By allowing banks to move to the new system for fresh loans and giving them the option to stay with the base rate system for existing loans, lenders will be spared a one-time hit to profits, which some had feared.
The Indian banking sector has struggled through a number of rate-setting methods over the last few years and has moved from a benchmark prime lending rate (BPLR) system to a base rate (or minimum lending rate) system and now the marginal cost of funds-based lending rate (MCLR). This time around, the shift was once again driven by weak transmission of interest rate cuts.
According to the new rules, every bank will be required to calculate its marginal cost of funds across different tenors. To this, the banks will add other components including operating cost and a tenor premium. A tenor premium is the compensation for the risk associated with lending for a longer time.
Taking all these components into account, banks will then publish an MCLR for overnight loans, one-month, three-months, six-months and one-year loans. This MCLR will act as the minimum or base lending rate for that tenor of loans irrespective of the borrower.
The final lending rate will be MCLR plus the spread that banks will charge for individual categories of borrowers.
“Apart from helping improve the transmission of policy rates into the lending rates of banks, these measures are expected to improve transparency in the methodology followed by banks for determining interest rates on advances,” RBI said in a statement on Thursday.
“The guidelines are also expected to ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks,” it said.
Bankers said the new rules related to differentiation based on loan tenor will help them price their loans better.
“The differentiation based on tenor will be a big positive for banks as now we would be able to price our loans based on the deposits of the corresponding tenor, rather than the older practice of considering 3-6 month deposit rate for computing base rates for all loans,” said R.K. Bansal, executive director at state-owned IDBI Bank Ltd. “Now we would be able to avoid this mismatch.”
With the inclusion of shorter term MCLR rates, banks can compete with the commercial paper market as well, Bansal added.
The new rules will reduce the cost of borrowing for companies, according to a Canara Bank official, who declined to be named as he is not authorized to speak to reporters.
“This has made the lending rate framework more dynamic as different banks could have different MCLRs for different tenures,” the official of the state-run lender said
In its circular, RBI said banks should specify the dates on which interest rates would be reset for borrowers. This reset must have at least once a year but can happen more frequently as well.
“The MCLR prevailing on the day the loan is sanctioned will be applicable till the next reset date, irrespective of the changes in the benchmark during the interim period,” said RBI.
Banks, however, have been given the option to keep outstanding loans linked to the base rate system even though it said existing borrowers will also have the option to move to an MCLR linked loan “at mutually acceptable terms”.
Most banks are unlikely to offer this option easily, said a banker who declined to be identified, which means that any immediate hit to profitability may be avoided.
“We don’t expect much of an impact on margins since the existing loans have been left untouched,” said Bansal.
Certain loans such as those extended under government schemes or under restructuring package, advances to banks’ depositors against their own deposits, loans to banks’ own employees including retired employees and loans linked to a market-determined external benchmark will be exempt from the MCLR rule, RBI said.
Fixed-rate loans granted by banks will also be exempt from MCLR. However, in case of hybrid loans where the interest rates are partly fixed and partly floating, interest rate on the floating portion should adhere to the MCLR guidelines.
RBI had mooted adoption of marginal cost of funds for calculation of lending rates in its April policy citing lack of effective transmission of its rate cuts into bank base rates. Bankers cited the stickiness of deposit rates and lack of credit demand as reasons for the delay in passing on lower rates.
“There might be short-term problems when dealing with the new norms as banks might want to offer better spreads to their larger customers who can negotiate a better rate. However, once the system stabilizes, it will be more or less uniform across the board and borrowers will get rates which reflect the interest rates in the economy better,” said Vibha Batra, senior vice-president at rating company Icra Ltd.
Batra added that there could be some shuffling in the home loan segment since existing borrowers will also want to move to an MCLR-linked rate if they see that as being cheaper. Banks, however, may be reluctant to allow existing borrowers to move.
“Lenders will have to come up with better schemes to retain home-loan customers by allowing them to move to the MCLR regime,” said Batra.
Source : http://goo.gl/2RGbeJ