Your home loan, personal loan and auto loan equated monthly instalments (EMIs) is all set to increase as several public and private sector banks have hiked their marginal cost of funds-based lending rate (MCLR) in last one week. State Bank of India (SBI), Bank of Baroda, Axis Bank, Kotak Mahindra Bank and IndusInd Bank have already surged their MCLR rates. SBI raised its MCLR by 10 basis points across all tenures while other banks rose it by 5-10 bps across the board. Other key lenders will start revising the rates soon to battle the rising inflation.
Here is all you need to know about MCLR and how it will impact your home and auto loan EMIs
What is MCLR?
Simply put, MCLR or marginal cost of funds-based lending rate is the minimum rate at which banks can offer loans to customers. The Reserve Bank of India introduced MCLR rates in 2016 to determine interest rates of various types of loans. It is an internal reference rate for banks to offer loans at a competitive and transparent rate. “In order to gauge the impact of a rate change in MCLR, one needs to first understand the workings of MCLR. The marginal cost of funds-based lending rate is the benchmark rate of interest followed by banks for lending. This essentially makes it the minimum rate of interest that a bank can lend at, without lowering the rates any further.” said Pramod Kathuria, founder and CEO, Easiloan.
How is MCLR Calculated?
MCLR is usually calculated based on the loan tenure or time period in which a borrower has to repay the loan. Banks also take into account the Cash Reserve Ratio, marginal cost of funds, tenor premiums and operational cost of the bank while deciding MCLR rates. “The MCLR is reviewed on a monthly basis, the loan repayment amounts are usually reset in six months to a year automatically, subject to the bank’s discretion and the loan agreement terms and conditions,” Easiloan CEO added.
Why Are Banks Increasing MCLR?
Banks usually adjust their interest rates when RBI tweaks the repo rates. Any change in the repo rates and marginal costs of funds will affect the MCLR rates. With the inflation hitting 17-month high in March, analysts believe that RBI-led Monetary Policy Committee will hike the repo rate by 25 basis points from as early as June. The central bank has kept repo rate unchanged for the eleventh consecutive time during April meeting. Anticipating a rise in repo rate, banks are increasing their MCLR.
What Does Latest Hike in MCLR Mean for Loan Borrowers?
The latest hikes in the MCLR by several banks, indicate that interest rates of loans are set to increase. “Any alteration in the MCLR would have a direct bearing on the cost of loans such as EMIs. The EMIs are directly proportional to MCLR. Higher the MCLR, higher the EMIs to be paid by the borrowers,” said Kathuria. So, the borrowers now have to shell more on EMIs for home loan, auto loan and personal loan. This hike will affect those who have floating rate loans, not the fixed interest rate loans.
What Can Borrowers Do Now as Banks Have Hiked MCLR?
With high MCLR rates pushing up home loan EMIs, loan borrowers can take two steps to reduce the impact. 1) They could increase the tenure of home loans to combat the rising cost of EMI payments. “The best way to avoid the extra burden due to higher interest rates is to increase the loan period to reduce the value of EMI payments,” suggested Nitin Mathur, CEO, Tavaga Advisory Services.
2) Loan borrowers could also make partial prepayment to bring down the EMIs. “It is even better to be able to pre-pay the loans to avoid interest rate fluctuations but the investor should take into account the prepayment penalty,” Mathur added.
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