Understanding MCLR before availing home loans
Resetting interest rates
The interest rates based on MCLR will be reset. The reset dates can either be based on the date of sanction of the loan/credit limits or linked to the date of review of MCLR. However, the MCLRprevailing on the day the loan is sanctioned will be applicable till the next reset date, irrespective of the changes in the benchmark during the interim. The periodicity of reset shall be one year or lower, depending upon the MCLR tenor opted by the customer. Existing loans linked to the Base Rate will continue as such till repayment or renewal, as the case may be. Thus banks will continue to review and publish Base Rate as earlier. However, existing borrowers will have the option to move to MCLR linked loan based on mutually acceptable terms. However to protect the interest of customers RBI has specified that such change over should not be treated as a foreclosure of existing facility and thus foreclosure charges shall not be applied.
How MCLR will affect borrowers?
Adoption of marginal cost of funds as against average cost of funds and the mandate that banks should declare MCLR on a monthly will ensure that interest rate changes are transmitted to borrowers in a more fast and effective manner. But the provision for reset period contravenes with the RBI’s objective of quick transmission of monetary policy. However the RBI has capped reset period at one year.
For e.g. if you are availing a housing loan on 01st July2016 from a bank with once year MCLR as 9.70% and 30 basis points spread the interest rate will be 10.00%. If as per the agreement with the bank the reset period for the housing loan is one year, even though theMCLR is reviewed monthly, and one year MCLR declared on 01st October2016 is 9.50% you will not enjoy any benefit. Your homeloan will be reset only on 01st July,2017. If on 01st July2017 the one year MCLR declared by the bank is 9.40% and the spread remains the same the rate on your housing loan for the next one year will be 9.70%. Accordingly, your installment or loan tenor may change. On the contrary if on 01st July2017 the one year MCLR declared by the bank is 9.90% and the spread remains the same the rate on your housing loan for the next one year will be 10.20%. Thus a borrower stands to benefit in a falling interest rate scenario and lose in a raising interest rate scenario.The frequent change in interest rate and the tenure of the loans will make managing long duration loans likehome loan rates anvolatile tasks. To avoid lot of complexities most of the banks have specified a standard reset period varying from 6 months to one year MCLR for retail products. SME and corporate customers have the option to negotiate across the multiple sets of resets starting from overnight MCLR.
Though the MCLR of most banks are lower than the base rates there is an element called Spreadwhich will be added to MCLR to determine the actual interest rate for a customer. Thus borrowers should not be carried away only by the MCLR rates quoted by banks. MCLR being applicable only on floating rate loans, there is a possibility that banks soon could shift to longfixed rate loans. However all loans upto 3 years should be only under MCLR.
It may be noted that MCLR is applicable only for banks and not for NBFCs and housingfinance companies. So, in case you are not willing to take the risk interest rate volatilities HFCs could be a good option for housing loans. Though interest rates charged by them would be higher there is higher flexibility regarding the quantum of finance also.
Only new loans and loans renewed with effect from 01st April2017 would be covered under MCLR. Existing customer has an option to switch to MCLR system by specific request. However there will be a cost associated with such switch and the decision to switch should be based on the total cost including MCLR, spread and conversion cost. Once you switch to MCLR regime you will not be able to go back to base rate regime. So it would be better for the existing borrowers to wait for the new system of calculation to settle before deciding to switch loans.
Jiz Paul ,Special General Manager, Catholic Syrian Bank Ltd
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