SBI has increased its MCLR by 5-10 basis points (bps) across different tenures whereas BOB hiked 5 bps on select tenures. SBI’s overnight MCLR stands at 8.1% and one-year MCLR at 8.85%. Cost of funds have gone up because of the increasing deposit rates on certain tenures.
When rates are on the higher side, prudent financial planning becomes crucial.
Two major public sector banks —the State Bank of India (SBI) and Bank of Baroda (BOB) — have increased their marginal cost of funds-based lending rates (MCLR). Private sector lenders such as HDFC Bank and Yes Bank have also hiked their MCLRs. There is a high probability that more banks will mimic this action, which could result in an increase in borrowers’ equated monthly instalments (EMIs).
SBI has increased its MCLR by 5-10 basis points (bps) across different tenures whereas BOB hiked 5 bps on select tenures. SBI’s overnight MCLR stands at 8.1% and one-year MCLR at 8.85%. Cost of funds have gone up because of the increasing deposit rates on certain tenures.
Since 2019, banks are offering loans linked to the repo rate to all new borrowers. Over the past year, the Reserve Bank of India (RBI) has kept the repo rate unchanged at 6.5%. However, the MCLR is rising, and the recent hikes worry borrowers. While the share of MCLR-linked loans has come down to 38.5% by March 2024 from 46.5% in June 2022, those borrowers still on MCLR need to closely monitor the movement of the rates and the impact on their EMIs.
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What should be a borrower’s strategy to reduce the impact of the increase in MCLR? First, such borrowers can negotiate with the lender to switch to Repo Linked Loan Rate (RLLR). They will have to pay switching and processing fees. Experts say that as the repo rate is likely to stay stable or decrease in the future, it may be beneficial to switch to RLLR. Moreover, RLLRs are more transparent than MCLRs and have a faster transmission on their loan rates.
Similarly, personal loans and auto loans linked to MCLR are affected by rate changes. Borrowers may find themselves paying more towards interest, thereby raising their overall cost of borrowing. Thus, they may feel the pressure to increase their EMIs or partially prepay to reduce the burden.
Monitor your loan terms
Borrowers must monitor their loan terms and understand how their interest rates are calculated. Many loans are tied to MCLR but may have different reset periods, typically every six months or annually. Being aware of these terms helps anticipate rate adjustments.
Since 2019, the Reserve Bank of India has mandated banks to offer loans linked to external benchmarks such as the repo rate. These loans often reflect changes in the policy rates more directly, offering transparency and quicker adjustments in interest rates compared to MCLR-linked loans.
MCLR is the minimum interest rate that a bank can charge on loans. Introduced by RBI in 2016, MCLR replaced the earlier base rate system. MCLR is determined by several factors, including the bank’s cost of funds, operating expenses, and the repo rate set by the RBI.
Planning and budgeting
When rates are on the higher side, prudent financial planning is crucial. Borrowers should review their budgets, focus on saving more and consider prepayment options if funds are available. This approach helps mitigate the impact of higher EMIs and maintain financial stability.
All floating rate loans sanctioned and renewed after 2016 are priced with reference to the MCLR which is the internal benchmark for such purposes. Adhil Shetty, CEO of Bankbazaar.com, says MCLR typically comprises marginal cost of funds, negative carry-on account of CRR, operating costs and tenure premium. “This could vary from bank to bank and this is why loan rates vary from one bank to another. It is relevant for banks as below this rate lenders cannot sanction loans. So, a lower MCLR would mean lower interest rates,” he says.
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In conclusion, remember that the RBI continues to monitor economic indicators closely and adjusts its policy rates accordingly. So, stay updated with the recent changes in the rates. Reassess debts and evaluate various options before borrowing new big-ticket loans. Also keep credit score on the higher side — 750 or above — to negotiate competitive deals.
