News Analysis

RBI’s status quo on policy stance offers little respite for borrowers

Radhika Merwin BL Research Bureau | Updated on January 12, 2018 Published on June 07, 2017

Borrowers who took loans under the new MCLR regime last year have a lot to cheer in the coming months.

But benefits of rate cuts over the past year will result in significant windfall gains for old borrowers under MCLR

By maintaining status quo on its neutral stance and holding rates for the fourth consecutive time, the RBI has offered very little to borrowers. At best borrowers are likely to see some token benefits as banks tinker with lending rates, due to still abundant liquidity in the system. For depositors, while sharp cuts as seen in 2016, are unlikely, deposit rates can continue to move lower. Since the RBI’s April policy, a few public sector banks have cut deposit rates by as much as 25-40 basis points across tenures; lending rates, on the other hand, have hardly moved.

Interestingly though, borrowers who took loans under the new MCLR regime last year, have a lot to cheer in the coming months. These borrowers will gain substantially from the sharp fall in MCLR over the past year, as lending rates get reset.

Ifs and buts for borrowers

The marginal cost of funds-based lending rate (MCLR) that the central bank introduced in April last year, has created varied sets of borrowers; each are impacted differently by the RBI and banks’ rate action.

Let us consider new borrowers first. Given the steep cut in lending rates since the beginning of the year, and lesser headroom for the RBI to cut rates further, new borrowers should go ahead and shop for the best deals in the market. SBI, the largest lender has cut its MCLR by 90 basis points since January and other banks by 70-80 basis points. But much of these cuts happened in January and since then, lending rates have more or less remained unchanged. Going ahead, MCLR cuts are likely to be very few and minimal.

Within the old borrowers category there are now two sub-segments to consider. Ones that have taken loans under the erstwhile base rate system and those that have borrowed under MCLR last year.

The former have had little respite as banks have wielded the scissors on MCLR, while only tinkering with base rate by 10-20 basis points over the past year. For these borrowers, switching into the new MCLR structure can result in huge savings in EMI; switching cost and the remaining tenure of the loan however, matter.

The category of borrowers that are likely to see substantial gains in EMIs this year are those that have taken loans under MCLR—just after April 2016. This is because MCLR has moved lower by a notable one percentage point on an average across banks since last April. Under MCLR based pricing, lending rates are reset only at specific intervals, corresponding to the tenure of the MCLR. As these resets happen in the coming months, borrowers should see significant reduction in their effective loan rates and hence EMIs. In case of SBI’s home loans, for instance, since the loans are benchmarked against the one-year MCLR, lending rates will only be reset every year. In April 2016, one-year MCLR stood at 9.2 per cent. The effective home loan rate then worked out to 9.45 per cent. With one-year MCLR at 8 per cent, the effective loan rate (remember the spread will remain the same at 25 basis points) works out to 8.25 per cent from April this year.

Depositors’ woes

Deposit rates have fallen by more than a percentage point through the year across banks. While the RBI’s has held its rates for a while now, the excess liquidity post demonetisation has continued to provide leeway for banks to cut deposit rates.

In fact, surprisingly, a few public sector banks have cut deposit rates by 25-40 basis points since the April Policy. Bank of Baroda, Bank of India, Canara Bank, Central Bank of India, Corporation Bank, IDBI Bank, Punjab National Bank and SBI are banks that have cut deposits rates substantially over the past two months, in certain tenures. With liquidity still sloshing around in the system, banks may continue to lower deposit rates, adding to depositors’ woes.

Published on June 07, 2017

A letter from the Editor

Dear Readers,

The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill. Everyone has been impacted.

Including your favourite business and financial newspaper. Our printing and distribution chains have been severely disrupted across the country, leaving readers without access to newspapers. Newspaper delivery agents have also been unable to service their customers because of multiple restrictions.

In these difficult times, we, at BusinessLine have been working continuously every day so that you are informed about all the developments – whether on the pandemic, on policy responses, or the impact on the world of business and finance. Our team has been working round the clock to keep track of developments so that you – the reader – gets accurate information and actionable insights so that you can protect your jobs, businesses, finances and investments.

We are trying our best to ensure the newspaper reaches your hands every day. We have also ensured that even if your paper is not delivered, you can access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute, so that you can access the information you want anywhere, anytime.

But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. Sustaining our quality journalism has become extremely challenging. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.

I appeal to all or readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. Doing so is easy. You can help us enormously simply by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section that offers rich investment advice from our highly qualified, in-house Research Bureau, the only such team in the Indian newspaper industry.

A little help from you can make a huge difference to the cause of quality journalism!


Support Quality Journalism
This article is closed for comments.
Please Email the Editor
You have read 1 out of 3 free articles for this week. For full access, please subscribe and get unlimited access to all sections.