The various issues under the much touted MCLR structure had led the RBI back to the drawing board, looking at plausible external benchmark rates, in place of bank-specific benchmarks. Citi India is now the first to launch a home loan product linked to the 3-month Government of India Treasury Bill benchmark rate.

By moving to an external benchmark, the RBI’s policy rate changes will get reflected faster, leading to better transmission. While this is good news for borrowers in a falling rate cycle, in a rising rate cycle, like now, it could hurt borrowers more. Also, home loans for customers opting for Citi India’s new product, will be priced based on the 3-month T-bill rate published on the 12th of each month by Financial Benchmarks India Pvt. Ltd. These rates will be reset or revised every quarter. The shorter reset period is also bound to pinch borrowers more, than under the MCLR structure for most other banks, where interest rates are only reset once every year.

However, the effective lending rate under Citi’s T-Bill home loan compares well with some of the cheapest rates offered by other banks under MCLR. For borrowers who don’t mind volatility, Citi India’s new home loan product pegged to T-Bill, may score better on transparency of rates.

Better transmission

The key issue with earlier rate structures such as MCLR or base rate was that each bank decides its benchmark rates — against which lending rates are benchmarked — based on its costs and profitability. Hence, banks’ rate actions could not follow a harmonised pattern and there were delays in transmission. While MCLR under which banks have to calculate their cost of funds based on the latest rates offered on deposits or borrowings, did help a bit, it did not address the transmission issue entirely. In fact, much of the fall in lending rates was triggered post-demonetisation, due to the surplus liquidity.

By mooting an external benchmark, the RBI has been looking to iron out some of these issues. As the rate will be market linked, policy rate changes will be reflected faster, leading to better transmission.

But in a rising rate cycle, borrowers are unlikely to be pleased with quicker transmission. In the past too, while banks have been tardy in passing on rate cuts, they have been surprisingly nimble in passing on rate hikes to borrowers. An external benchmark that is quick to respond to policy rate changes will only hurt borrowers more.

Citi India’s home loan rate will also be reset more frequently --- every quarter — than most home loan products under MCLR offered by other leading Indian banks. Under MCLR-based pricing, lending rates are reset only at intervals corresponding to the tenure of the MCLR. In the case of home loans, since the loans are benchmarked against the one-year MCLR in most banks, lending rates are reset only once every year.

Rate scores

In case of Citi India’s home loan product under MCLR, however, rates are even now reset every quarter, as they are linked to the 3-month MCLR. Effective Feb 7, 2018, Citi India’s 3-month MCLR stood at 8 per cent. The effective lending rate (for salaried without home loan) works out to 8.4-8.9 per cent currently.

According to information available on Citi India’s website, the interest rate resets of the T-Bill linked home loan are on March 1, June 1, September 1 and December 1. The T-Bill Benchmark linked lending rate as of Feb 12, 2018, stands at 6.25 per cent. Currently, the T-Bill rate is around 6.3 per cent. With a spread of 1.95 per cent to 2.7 per cent on this (based on website info), the effective lending rates could work out to 8.2-8.95 per cent.

Borrowers with a higher credit score and, hence, lower spread may enjoy a lower effective lending rate under T-Bill home loans than MCLR to begin with. Given that both loans under both MCLR and T-Bill are reset every quarter for Citi India, customers preferring more transparency may opt for the T-Bill home loan, where the benchmark rate is publicly available.

The 8.2 per cent effective lending rate under the T-Bill home loan also compares well with some of the best deals in the market.

For loans up to ₹75 lakh, Indian Bank offers 8.25 per cent on home loans. Allahabad Bank, Bank of India, Union Bank of India and Central Bank of India charge 8.3 per cent on home loans. SBI, after its recent hike in MCLR, charges 8.55 per cent.

But borrowers need to note that the interest reset for most of these banks is reset once every year. Hence, if you are averse to too much volatility in your home loan rate, then deals under MCLR may be a better bet.

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