Post the demonetisation of high-denomination notes by the Modi government, the clamour for a rate cut was strong and everyone was expecting the RBI to go for a 25-50 bps rate cut in its policy review today. However, the RBI, under the leadership of Governor Urjit Patel, surprised everyone by keeping the repo rate unchanged at 6.25 per cent.
Whatever be the case, experts say that the apex bank has already reduced the key policy rate by 1.75 per cent since January 2015, which makes a strong case for banks and housing finance companies (HFCs) to reduce their lending rates. But strangely enough, banks and HFCs are yet to soften their rates. Although some banks have in recent months cut their lending rates marginally, but that is not considered enough to provide borrowers any major relief.
So the question is: when will the benefits of these rate cuts be passed on by banks and HFCs to the borrowers of housing and other loans, and since when their EMIs will start coming down?
Experts say that banks have so far not passed on the rate cuts because their costs of funds do not come down immediately but with a lag. Also, the mounting NPAs are a huge problem which cannot be overlooked. Therefore, bankers are very sanguine about preserving their margin to be able to provide for bad loans. Still, some experts believe, all this could change dramatically.
“With the swelling of deposits following demonetization, it is possible that this pass on effect will gather speed. The new CASA, which is very significant, is coming at even lower cost of funds. Hence, I expect customers to start benefiting from rate cuts soon,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.
Industry experts, including realtors, are also hopeful of possible cuts in lending rates in the near future. Talking about Wednesday’s monetary policy, Surendra Hiranandani, chairman & managing director of House of Hiranandani, said, “The highlight of the policy was the withdrawal of incremental CRR that will have an immediate effect of 25 bps and provide further liquidity in the system. This will definitely help banks to drop lending rates, thereby giving the economy a much-needed breather.”
Some experts, however, believe that while interest rates on unsecured loans may remain unchanged at least for now, but the situation may change after a rate cut in the next policy meet. “We were expecting a rate cut owing to liquidity inflow within the banking system since the last month. However, the withdrawal of incremental CRR from Dec 10 is a positive step. I expect interest rates on unsecured loans to remain unchanged. There may be minor reductions in home loan rates once CRR constraint is withdrawn. But, it is likely to be a few and far between. However, I do expect a rate cut in the next policy meet, thereby encouraging banks to reduce lending rates,” says Naveen Kukreja, CEO & co-founder, Paisabazaar.com.
IMPACT OF LENDING RATE CUTS ON BORROWERS
It may, however, be noted here that while new home loan borrowers benefit from a cut in lending rates immediately, that is not the case for the existing borrowers. For new borrowers, for instance, a 25-50 bps rate cut would mean a significant amount of savings. Assume a loan of Rs.50 lakh borrowed for a period of 20 years currently at 9.25% interest. This would imply an EMI of Rs.45,793. Over 20 years, the borrower would be paying Rs.59,90,402 as interest. A 25 bps fall in interest rate would bring down the EMI to Rs.44,986 and the total interest paid to Rs.57,96,711. A 50 bps rate cut would bring down the EMI to Rs.44,186 and the total interest payable to Rs.56,04,529. That’s Rs.1,93,691 saved in case of a 25 bps cut and Rs.3,85,873 saved in case of a 50 bps cut.
For the existing borrowers, however, the rate cut would take time to reflect until the next reset period if they are on MCLR. “That is because if you have taken an MCLR-linked loan, the interest rate that you pay is subject to changes at fixed intervals as per the tenor for which rates are linked. Also, the change in the interest rate would usually be seen in the reduced tenor and not in the EMI until you decide to refinance your loan,” says Adhil Shetty, founder & CEO of BankBazaar.com.
By- Sanjeev Sinha