The savings from a switchover to the marginal cost of funds-based lending rate (MCLR) are now so large — almost sixfold, in some cases — after this month’s rate cuts that more customers might migrate to it, reports Shritama Bose in Mumbai. For a Rs 50-lakh loan from State Bank of India (SBI) with a tenure of 20 years, the savings now are nearly Rs 6 lakh.

Given SBI’s base rate is 9.25%, a customer would repay a total of Rs 1,11,46,423 . A switch to the MCLR at 8.65% — 8% plus a spread of 65 basis points — would lower the repayable amount to Rs 1,05,28,082. Add the switchover fee of R25,000 and this would be R1,05,53,082. That’s a saving of R5.93 lakh. Earlier, at a base rate of 9.3%, the same customer would have repaid R1,11,85,574 at an interest rate of 9.5%. A switch to the MCLR at 9.3% — 8.9% plus a spread of 40 basis points — would have brought down the amount repayable to R1,10,29,318. That’s a saving of Rs 1.56 lakh, but the switchover fee — at 0.5% of the outstanding amount, or R25,000 — would lower that to R1.31 lakh.

However, switching over makes sense only for those who have a substantial amount of time left to pay off their loans. SBI managing director Rajnish Kumar said, “If the residual for the existing loan is much longer, then it makes sense. But if the residual is for a year or two years, then it doesn’t make sense.”

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He added that the reason behind a low share of borrowers switching to the MCLR regime so far might have been the low differential between base rate repayables and MCLR-linked repayables. About 15% of the home loans on SBI’s books are linked to the MCLR regime, chairman Arundhati Bhattacharya had said on January 2.

However, switching over makes sense only for those who have a substantial amount of time left to pay off their loans. SBI managing director Rajnish Kumar said, “If the residual for the existing loan is much longer, then it makes sense. But if the residual is for a year or two years, then it doesn’t make sense.”

He added that the reason behind a low share of borrowers switching to the MCLR regime so far might have been the low differential between base rate repayables and MCLR-linked repayables. About 15% of the home loans on SBI’s books are linked to the MCLR regime, chairman Arundhati Bhattacharya had said on January 2.