There is a relief for those who have availed Home Loans pre-April 2016 and are still stuck on the old base rate home loans rates and have not been revised by banks with the new market rates. The Reserve Bank of India has directed banks all over the country to link older home loan rates to the current market-linked benchmark. That means linking the Base Rate to the MCLR. This will be in effect 1st April 2018. By next week necessary instruction regarding this will be issued by the central bank.
Under the MCLR (Marginal Cost of Funds based Lending Rates) – the minimum lending rate below which a bank can’t lend to customers – system, the rate is calculated by using the cost incurred on incremental deposits, not average cost of deposits. The interest rate charged under the base rate is higher compared to the MCLR regime. More likely despite of the introduction of MCLR in April 2017 many banks were following this and continued lending Home loans on previous Base Rate itself. Hence, it was important to take this.
MCLR i.e. The Marginal Cost of Funds based Lending Rate is a new method introduced by RBI which replaced the ‘base Rate.’ The Base Rate was introduced 2010 by RBI to regulate the lending systems throughout all the Banks. Base Rate was in form till March 2016 after which it was revoked in April 2016 with the introduction of MCLR. From 1st April 2016, RBI made it compulsory for all banks to follow marginal Cost of funds based lending rates for all the Home Loans which were on wards 1st April 2016.
The MCLR is more responsive to money related approach transmission and is firmly connected to the deposit rates. Under MCLR- the banks can’t lend below the minimum lending rate. MCLR is computed on incremental cost of assets, making it a more solid benchmark rate than the base rate. It is normally calculated by considering normal cost of assets. For example, since April 2016, while the repo rate has been lessened by 75 premise focuses, State Bank of India’s base rate has descended by 65 premise focuses however the one-year MCLR by as much as 1.25 rate focuses. One premise point is one-hundredth of a rate point.
Since 21 months from when the base rate was discarded and the MCLR was introduced, on an average the interest rate has come down from 11.23% on April 16 to 10.26% on December 2017. The beneficiaries of these reductions have largely been those with interest rates linked to MCLR.
So in short with the decision of RBI, people who were still paying their Home Loan on based rate will be now shifted to MCLR and this will definitely reduce their interest rate and hence the EMIs.