Currently, banks can decide their own benchmark lending rate, the MCLR. What if your loan was linked to a benchmark set by a third-party? Will you get a better deal?
Vivina Vishwanathan | Last Published: Tue, Mar 13 2018. 08 33 AM IST | LiveMint
India has floating home loans that become expensive as soon as the interest rates go up, but don’t float down when the rates fall. This happens because the banking regulator allows banks to peg their home loan rates to a benchmark that the banks themselves control—allowing them to benefit when they choose to, at the cost of you, the retail borrower. But it looks as if competition is finally arriving in this segment with a new home loan product from Citibank India, which uses a third-party benchmark. Here, we examine if such a thing is good for you or not. But first, some background.
Several times, the Reserve Bank of India (RBI) in its monetary policy review has flagged the issue of rate cut benefits not being passed on to retail customers. It has tried thrice to rationalize the benchmark lending rate linked to home loans, in a way that there is transparency and the benefits are passed on to consumers.
In the last 7 years, we have also seen home loans move through three benchmark rates—from benchmark prime lending rate (BPLR) to base rate in 2010 and then to marginal cost of funds based lending rate(MCLR) in 2016. However, none of these attempts seem to have worked and the desired goal of transparency in loan rates has still not been delivered.
Last year, during a monetary policy announcement, RBI governor Urjit Patel indicated that MCLR could be reviewed as the rate transmission to customers continued to be slow. While the banking regulator waffles on this, Citibank has come out with a home loan product that is linked to 3-month treasury bills (T-Bills).
Is it allowed to do this? “RBI permits banks to link their variable rate home loans to MCLR, provide fixed-rate loans, semi-fixed-rate loans or (even) link their loans to an external benchmark,” said Rohit Ranjan, head of secured lending, Citibank India. This is not the first time a bank has linked its home loan product to an external benchmark. ING Vyasa Bank Ltd, in 2005, had a home loan product that was linked to Mumbai Inter-Bank Offer Rate (Mibor) (you can read more about it here). Let’s understand the home loan products linked to T-Bills and see if you should opt for them.
Citi’s new home loan product is linked to the 3-month Government of India T-Bill benchmark. It is an external reference rate. Citi has decided to pick this data from the Financial Benchmarks India Pvt. Ltd (FBIL), which is a company that aims to develop and administer benchmarks relating to money market, government securities and foreign exchange in India.
How is the data for this benchmark arrived at? According to FBIL, it is based on T-Bills traded in the market. The benchmark rate is announced everyday at 5.30pm, except on holidays.
It is calculated from the data of secondary market trades executed and reported up to 5pm on the Negotiated Dealing System – Order Matching Platform (NDS-OM)—which is an electronic system for trading government securities in the secondary market. All trades of Rs5 crore or more, and having had a minimum of three trades in each tenure are considered. The benchmark T-Bill data is then published for seven different tenures: 14 days, 1 month, 2 months, 3 months, 6 months, 9 months and 12 months.
So that there is consistency, the bank has decided to pick the rate published on 12th day of each month. “Our endeavour is to provide as much stability as possible on rates to our customers. We believe a date towards the middle of the month best suits this objective,” said Ranjan. Usually, the RBI too comes out with its bi-monthly monetary policy in the first week of the month.
As this home loan product will be linked to 3-month T-Bill data, its reset clause will also be set for 3 months. This means, every 3 months your home loan interest would change based on movements in the external benchmark rate.
Is a 3-month T-Bill benchmark appropriate for 20-30 year loans? In a developed market such as the US, mortgages are linked to longer duration benchmark rates. “Linking long-term loans to longer-duration benchmark rates is more appropriate to the extend that it is based on duration. But at the same time in the US, for example, mortgages tend to be fixed. Then it makes sense to link to longer term loan. In case of Citi’s home loan product, the reset is more frequent and linking to a long-term rate may not be appropriate. It is just a strategy,” said R. Sivakumar, head, fixed income, Axis Mutual Fund.
The home loan also comes with a spread. In this case, it is around 200 basis points, plus T-Bill. The 200 basis points can vary depending on your credit profile. “As of today, home loan rate linked to t-bills will be around 8.5%….If your credit profile is good, then the spread could be lower,” said Ranjan. Remember that the spread that you agree to while signing a loan agreement will not be changed till the end of loan tenure.
How T-Bill is different
The RBI has said many times that there is no transparency in the way floating interest rate on home loans is calculated, and that there is need for a benchmark rate that is market linked so that any change in policy rates can be passed on to the consumers. Usually, banks keep the rates high even in a falling interest rate regime and you don’t see an immediate impact or cut in policy rates. To understand if home loans linked to T-Bills will bring in transparency, we compared T-Bills with MCLR and base rate. If you look at both comparisons, the drop in interest rates linked to MCLR as well as base rate come with a lag. If the home loan rates are linked to T-Bills, the reflection on falling interest rate is likely to be immediate on your home loan. The movement in T-Bill yields is a result of two parameters—repo rate and liquidity. Hence, if it is a falling interest rate regime, the fall will reflect faster in your loan rates.
Currently, when your home loan is linked to MCLR, the impact on your home loan rate is also a result of the banks’ cost of funds and other parameters associated with the bank that you take the loan from.
What should you do?
The concept of linking home loans to an external benchmark rate (instead of an internal one) is a good idea, as it makes the process transparent. Typically, banks have some leeway in controlling their rates. An external rate should obviate such a possibility.
However, is it possible for banks to manipulate the external benchmark too? “It is very difficult, since the cut off rate is decided by RBI. The central bank has the ability to manipulate it but a market participant can’t since it is a big and liquid market,” said Sivakumar.
As of now, the interest rate on home loans that is linked to T-Bills and MCLR are similar, due to the spreads attached to each one of them. A Citi home loan linked to MCLR has a spread of 40 basis points while the one that is linked to the T-Bills would have a spread of 200 basis points. Experts say that interest rates linked to an external benchmark will bring transparency and hence will help you to benefit more from falling interest rates.
“The rate will fall as well as rise faster. In T-Bills you will see a decrease before the MCLR decreases. There will be periods where the rates will lead or lag each other. But over the life cycle of the mortgage, say 20 to 30 years, the difference should not be huge, assuming the spread of 200 basis points,” said Sivakumar.
Currently, there have been signals of a higher interest rate regime kicking in. Hence, you may not benefit from T-Bill rates immediately. “The experience with base rate and MCLR has been that the rates tend to fall much more slowly when policy rates are falling. The moment you have an external benchmark, and there is no bank controlling it, the loan will be far more transparent and you are better off having that— especially when rates are falling,” said Vishal Dhawan, a Mumbai-based financial planner.
But what about the 200 basis point spread? “The spread is a function of what you end up believing is the cost of running a business. Ultimately, the bank will also be raising resources, which is not necessarily linked to 3-month T-Bill rate. It will be unfair to believe that the cost of fund for the bank is only the 3-month T-Bill rate and the spread is too much. The value will become far more evident when the rate cycle turns again and rates go down—right now it may not make a big difference,” added Dhawan.
As a borrower, however, you now have an option to pick a home loan based on an external benchmark. If it doesn’t work for you, you always have the option to switch to an MCLR-linked home loan.
Don’t see property prices going up for now: Renu Sud Karnad, Managing Director, HDFC
ANIL URS | Published on March 14, 2018 | The Hindu Business Line
BENGALURU, MARCH 14
Renu Sud Karnad, Managing Director, HDFC, in an interview with BusinessLine, explains how the realty and home-loan sectors are shaping up as the new regulatory regime sets in. Excerpts:
How is the property market doing pan-India?
Apart from New Delhi and Chennai, where we see slow offtake, the market is good in other major cities. By good I mean, we are doing good business.
How do you see property prices moving?
As I see it now, I don’t see any increase in property rates happening.
What about interest rates, especially in the wake of rising bond rates?
Yes. Interest rates are rising a little bit. But let me put it this way. I don’t think the rates are going to come down. I think next year we will see a quarter to 1 per cent increase in rates.
Is this rise in rates low, or how do we understand it?
A quarter to half a per cent is nothing when compared to the high interest rate days, when home loans were going at 13-14 per cent. Now they are at 8.3-8.4 per cent. So they may go up to 8.9-9 per cent.
How is HDFC’s home loan growth?
At 23 per cent, our home loan growth is excellent. We have seen good growth coming from Mumbai, Bengaluru, and Pune. In the National Capital Region (NCR) it is a little slow. Otherwise, home loan growth normally is about 15-18 per cent.
Are any banks on your radar for acquisitions?
We are always on the look out whenever an opportunity arises.
How far are you in picking up CanFin Homes?
Actually, you should ask them, because five to six people are talking to them. I don’t know what pressure of time they have and don’t know when they need to announce it. Yes, we are also talking to them.
Have you firmed up your business plan for the next fiscal (2018-19)?
We are in the process. But I can tell you we are looking at 15-18 per cent growth.
How is the borrowing by property developers?
They, I think, are now looking at new avenues. PE funds are giving them money. Banks have also started to explore. Once the sector gets used to new regulatory framework, we could see good amount of lending.
Definitely the last one year had been challenging from them. But I think in the next six months, things should settle down.
PTI | March 5, 2018 | India Today
Mumbai, Mar 5 (PTI) Even as rivals continue to be reluctant about adopting external benchmarks for setting lending rates, American lender Citi today launched the countrys first market benchmark rate-linked lending product.
The bank has introduced a home loan product that will be linked to the rate of treasury bills, which is used by government for its short-term borrowings.
The lender, which already has similar external benchmark-linked products in other markets like the US and Singapore, said it does not see any impact on net interest margin (NIM), a key determinant of profitability, because of the launch of the product where a borrowers rates will be reviewed every three months.
Frustrated at poor transmission of its policy moves into lending rates for borrowers, the Reserve Bank had last October mooted the idea of moving to a market-linked benchmark and suggested three such instruments, including the T-bills rate, the rate for certificate of deposits and its own repo rate to determine the interest rate.
Bankers, led by their lobby grouping Indian Banks Association, had opposed such a move, claiming that the existing marginal cost of funding based lending rates is working well and also pointed out that deposits are not linked to any market benchmark.
Citis country business manager for global consumer banking Shinjini Kumar, said a shift to a market benchmark like the T-bill is transparent, simple and will also help with better transmission.
Loans will be sold at a fixed spread above the T-bill rate which will be maintained throughout the loan tenure, she said, adding there will be quarterly readjustments for the borrower.
There will be a range of spread above the T-bill rate which the bank will follow, its head of secured lending Rohit Ranjan said, adding the average spread will be 2 percentage points. Existing customers will also be able to move to the new product without any refinancing costs, he added.
The banks country treasurer Badrinivas NC sought to downplay concerns surrounding customers being exposed to T- bill rate volatilities, which may happen due to external events like the taper tantrum in 2013 and hinted that the rates also reflect the policy decisions at a particular point of time which get captured through the quarterly resets.
He said the bank has a diversified liability profile, including a high 60 per cent composition on the low-cost current and savings account deposits and also other retail term deposits, which will make it possible for it to offer such a product.
The bank feels the RBI will be on a long pause and may go for a hike in rates only if there is a surge in inflation, he said.
In a few cases, especially concerning top corporates, the bank has been benchmarking rates against market benchmarks but those were deals done on a one-on-one basis, and this is the first time that any lender is going to the market with such an offering, Kumar said.
The bank had a gross home loan book of Rs 9,000 crore, while the overall India book stood at Rs 57,000 crore as of December 2017. Even as rivals struggle with dud assets, its NPAs on the mortgage lending is a healthy 0.05 per cent, the bank said.
Commenting on the recent changes in priority sector lending (PSL) requirements for foreign banks, Kumar said Citi is already compliant on PSL requirements, including the sub- categories and in some cases it uses priority sector lending certificates.
The bank will be resorting to use of digital technologies and tying up with partners to comply with the new requirements, she said. PTI AA BEN BEN SDM
Sidhartha | Updated: Mar 1, 2018, 17:41 IST | Time of India
NEW DELHI: Several lenders, including State Bank of India, ICICI Bank and Punjab National Bank on Thursday announced an increase in lending rates, a move that may make your home loans a little expensive.
The hikes come amid tightening liquidity or cash supply in the banking system, accentuated by the year-end rush that prompted SBI, the country’s largest lender, to raise deposit rates by up to 50 basis points for retail borrowers.
On Thursday, SBI increased its marginal cost of lending rate, which is linked to the interest rate on funds raised by a bank, by 20 basis points (8.15% from 7.95%).
Like SBI, starting March 1, ICICI Bank and PNB increased their MCLR but by a slightly lower magnitude of 15 basis points. Some lenders such as HDFC Bank will review rates next week.
Typically, while extending a home loan, banks keep a spread over the MCLR which results in a higher interest rate on these loans. PNB said that its home loans will cost 8.6% for most borrowers, while women will get it at 8.55%.
SBI has a spread of 40 basis points over the MCLR for most borrowers and 35 basis points for women borrowers (100 basis points equal a percentage point).
While the government has been seeking a lower interest rate and has repeatedly prodded the Reserve Bank of India to pare policy rates, the central bank has resisted a softer interest rate regime, arguing that there is a risk of higher inflation given the recent rise in global crude petroleum prices as well as the impact of domestic measures such as higher allowances for government employees following implementation of the seventh pay commission recommendations. Besides, it has pointed to higher food prices to refrain from cutting policy rates.
With economic growth picking up, RBI may not move that path now and last month the government’s chief economic adviser Arvind Subramanian had acknowledged that the scope to lower rates may have narrowed.
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.
A prudent borrower will plan it wisely to make his home loan EMIs affordable.
Ravi Kumar Diwaker | Magicbricks | February 23, 2018, 18:21 IST
Home loan is a long-term financial commitment and it is important to ensure your EMIs are within your budget and do not impact your monthly income. It is seen as a financial burden which has to be planned very carefully.
A prudent borrower will plan it wisely to make his home loan EMIs affordable. Often, home buyers choose a long-term home loan in order to pay a lower EMI but end up paying more interest.
These easy steps can help you reduce the total interest on your home loan.
Buyers should choose a short-term for their home loans as it ensures a reduced long-term financial commitment. A 15-year loan is better than a 20-year home loan as it results in a lower interest rate on your total amount. Your monthly EMI may be higher but interest will be less. A short-term tenure means the principal amount of your loan is paid faster leads to lower interest rate because interest is calculated on the outstanding principal amount.
Reduce interest rate
You must always choose the lowest interest rate home loan and go ahead with refinancing of your loan if your interest rate is coming down.
Pay the principal
Make sure that you are paying the principal as quickly as possible as the lesser principal amount means lesser interest to be paid to the bank. If you have extra cash in hand then try to give it to the bank and get your principal amount reduced. Some buyers do that so that the EMI interest can come down.
More than one EMI
You can also pay more than one EMI every year. This will reduce your loan tenure and interest cost as well. It is very important to calculate your finances based on your income. It will make you pay more but ultimately you will be benefited.
With rise in your salary, you can choose to pay a higher amount of EMI. It is good to reduce your home loan interest burden. You can calculate the interest rate as per your home loan amount, tenure and interest to find out how much amount you are paying less by this step.
Compare interest rates
Banks will not reduce the interest rate to the existing home loan borrowers till you go there and ask them to do it and fill a form for the same. If your existing bank does not reduce the interest rate then find out which bank is offering you lower interest rate and get your loan refinanced. You must also find out the charges for switching the loan before going ahead with refinancing.
These are some tips for home loan borrowers to help them reduce the burden of home loans. The government is already giving the CLSS benefit to buyers purchasing affordable homes. You can also opt for that so you pay less amount of EMI. A short-term loan may reduce your interest payout but it will increase your EMI and may impact your monthly income. You need to choose the EMI amount that is affordable to your pocket.
PTI | Published Date: Jan 02, 2018 07:52 am | FirstPost.com
Mumbai: In a major boost to homebuyers, the country’s largest lender State Bank of India has extended the processing fee waiver till March-end and also reduced the base rate by a sharp 30 basis points to 8.65 percent.
The reduction in base rate, effective from Monday, is going to bring relief for nearly 80 lakh customers of the bank whose loans are still linked to the base rate and not the marginal cost of funds-based lending rates (MCLR).
Flushed with excess liquidity, SBI had announced processing fee waiver for auto and home loans late August. In fact, since last fiscal, and especially after the November 2016 note-ban, all the banks have been saddled with excess liquidity amidst continuing degrowth in industrial credit.
For the first time in over two years, credit uptake by corporates entered the positive terrain but with a paltry 1 percent growth in November this year. “We’ve decided to extend the ongoing waiver on home loan processing fees till March 31, 2018 for new customers and others looking to switch their existing loans to us,” SBI said in a statement on Monday.
Managing director for retail and digital banking P K Gupta said that with stability returning to the realty space after the implementation of the Real Estate Act (Rera), he sees lots of demand for home loans going ahead. “With most states having the realty regulator Rera now, stability has returned to the market in terms of project approvals. The teething troubles of the initial Rera months are behind the market. So, we foresee lots of demand for home loans. So, we think this is the right time to continue with that waiver to enable people for buy homes,” Gupta said in a concall.
The bank revised down the base rate to 8.65 percent for existing customers from 8.95 percent, while the BPLR (benchmark prime lending rate) is down from 13.70 percent to 13.40 percent.
The bank, however, did not change the marginal cost of funds-based lending rate (MCLR). The one-year MCLR of the bank stands at 7.95 percent.
“We had done the rate review in the last week of December, and based on whatever deposits rates we had, our base rate was brought down by 30 basis points to 8.65 percent now,” Gupta said.
The move is going to give nearly 80 lakh customers of SBI who were on the old lending rate regimes and have not moved to MCLR. Banks review MCLR on a monthly basis, while the base rate revision happens once a quarter.
“The MCLR was reduced earlier also as the gap between MCLR and base rate had become quite wide. This reduction will help in reducing that gap,” he said.
Due to weak transmission of policy rate by banks under the base rate system, the Reserve Bank had introduced the MCLR from 1 April, 2016.
With the banks not fully passing on the rate cuts that the central bank has done in the past two years, the regulator is not happy even with the base rate regime and has mooted an external benchmark to better reflect market realities and speedier transmission.
Gupta said the current revision of base rate will ensure transmission of the policy rate cuts in the recent past.