06-April-2016 written by : FSI-Team
Planning to buy your dream home this fiscal? Or upgrade to a new car? If you are, and are looking at availing of a housing or auto loan respectively to turn your dreams into a reality, it is likely that you will soon have something to cheer about.
Coming up shortly is the new fiscal year’s first bi-monthly monetary policy and it remains to be seen what changes this brings in to the lending sector. It is expected that the interest rates are likely to be cut by at least 25 basis points (bps). Should this happen, it is likely to set the tone for the rest of the financial year and will herald in a welcome change for individuals. India’s apex bank, the Reserve Bank of India (RBI) has instructed lenders to adopt this new change as there has not been full monetary policy transmission.
Traditionally, a lender would base their interest rates on the basis of the average cost of funds method to calculate the base rate, which in turn would determine on both auto and home loans interest rate.
However, what has now been put into effect a new lending rate regime, the Marginal Cost of Funds Lending Rate (MCLR), with effect from April 1, 2016. These guidelines were laid down by the RBI in December 2015 itself, for implementation starting April 1, 2016. For some banks such as HDFC Bank and the SBI, this has translated into a drop of rates by 10 basis points, while others such as Bank of Baroda the fall is significantly sharper by as much as 35 basis points. Even accounting for the spreads factored in by every lender, this indeed spells cheer for those individuals buying either of these products.
Marginal funds refer to the money raised by banks in the last month or quarter just prior to the lending rate review. The MCLR is calculated keeping in mind the financial institutions’ marginal cost of funds, which is nothing but the rate at which banks borrow money, the return on equity or RoE which refers to the lender’s profitability, negative carry owing to the cash reserve ratio with the RBI, operating costs and tenure premium. The actual lending rate then will be the MCLR plus the spread as deemed fit by the lenders themselves, which is determined by a combination of the lender’s strategy as well as the credit risk of the borrower.
The previous interest rates were directly linked to the base rate. With the MCLR, the risk premium will be the spread that banks will charge over and above the MCLR. This means that the credit risk profile of the individual borrower will have a role to play on the interest rate offered for a loan.
The MCLR will therefore reduce the power for financial institutions to continue to offer higher rates of interest even when the RBI reduces rates.
Having a good credit score is definitely something one should ensure to avail of the maximum benefit in terms of the interest rate when it comes to a loan. It is easy to check your credit report. While none of the credit information companies or bureaus offers a free credit report currently, you can purchase the same upon payment of a nominal fee. After all, why let your credit score be the reason because of which you are unable to realize your dreams?
But irrespective of your credit score, do remember to compare home loans before you narrow down your decision and apply to a specific financial institution. Similarly, if purchasing a car, do perform a car loan interest rate comparison before driving home your new vehicle.
Staying credit healthy offers you loans at the most competitive pricing, hence start working on your credit score now, to walk away easily with your much longed-for home or car in the near future!