RBI monetary policy: Lower EMIs under MCLR regime coming, says Rajan; 10 things to know

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Updated: June 07, 2016 1:49 PM

MCLR takes into account cost of maintaining CRR, marginal Cost of funds, interest rates offered on savings, current and term-deposit accounts, cost of borrowings including short-term borrowing rate which is repo rate, long-term borrowing rates and return on networth.

Raghuram Rajan said lending rates would come down since banks would seek to channelise the deposits into productive lending avenues instead of merely putting them into government securities. (AP)Raghuram Rajan said lending rates would come down since banks would seek to channelise the deposits into productive lending avenues instead of merely putting them into government securities. (AP)

Reserve Bank of India Governor Raghuram Rajan during its monetary policy review on Tuesday said banks are expected to gradually reduce lending rates as deposit growth has been healthy during April and May, even as the Marginal Cost of fund based Lending Rate (MCLR) regime came into operation from April 1, 2016.

Rajan said lending rates would come down since banks would seek to channelise the deposits into productive lending avenues instead of merely putting them into government securities.

The RBI Governor also said that the Base Rate option would not be withdrawn in a hurry. Existing borrowers under the Base Rate, would have the option to switch over to the MCLR. Under the Base Rate system banks were not allowed to lend below what was termed as their Base Rate.

So what is this MCLR regime and should you switch over your loan to the new regime? Here is 10 points guide on the new regime:

How is MCLR arrived at by banks?

MCLR takes into account cost of maintaining CRR, marginal Cost of funds, interest rates offered on savings, current and term-deposit accounts, cost of borrowings including short-term borrowing rate which is repo rate, long-term borrowing rates and return on networth.

When did it come into effect?

The MCLR-based regime has come into effect from April 1, 2016.

How would it benefit borrowers?

The new regime is expected to help borrowers by allowing lenders to transmit policy rate reductions faster than the earlier Base Rate system. “MCLR’s monthly reporting would mean banks would now be compelled to pass on benefits of rate cuts to borrowers,” says Naveen Kukreja, CEO & co-founder, Paisabazaar.com.

To which loans would MCLR apply?

The MCLR regime is applicable on floating rate home loans and term loans to SMEs and middle-level corporates.

To which loans will it not apply?

MCLR regime will not apply to government-run credit schemes and fixed-rate home loans, personal loans, car loans or other fixed-rate loans.

What happens to existing borrowers under Base Rate?

Existing borrowers can continue with the base rate system till repayment but will have option to shift to the MCLR-based system. However, once the borrower has opted for the MCLR-based system, they cannot shift back to the old base rate system.

How will the lending rates change under MCLR?

Under the new regime, banks will have to specify the reset date for interest reset at the time of sanctioning loans. The MCLR agreed upon will be applicable till the next reset date, irrespective of the changes in the rates by the bank during that period. RBI has capped the period between two reset dates at 1 year.

Can banks lend below MCLR?

Like Base Rate, once the MCLR has been fixed, banks are not allowed to lend below that rate.

Should your shift to MCLR from Base Rate?

With falling interest rates, borrowers under MCLR stand to benefit since the transmission would be swifter. Naveen Kukreja feels advises existing borrowers to shift to the new regime. “For an existing borrower, migrating to the MCLR system will make sense as it is more dynamic, better regulated and more effective in transmitting the monetary policy than the old Base Rate system,” says Kukreja.

Adhil Shetty, CEO, BankBazaar.com agrees and says, “existing home loan borrowers should do a cost-benefit analysis before shifting to MCLR. Interest rates are at a five-year low and those with long-term loans may benefit by moving to MCLR. Before they do so, they should factor in the costs of loan conversion and the fact that there would be an upward revision of rates at some point in the future.”

Under what situation can the MCLR regime hurt?

The flip side to quick lowering would be quick raising of lending rates in a tighter interest-rate regime. Higher EMIs would be reflected swifter than the earlier Base Rate system.

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