New MCLR regime could push banks to grant fixed rate loans


Interest rates on home loans, auto loans and personal loans will decrease with the implementation of the new marginal cost-based lending rate (MCLR), which took effect on April 1. Floating loan products like auto loans and personal loans offered by public sector banks can become fixed rate loans. Private banks already have fixed loans for these products, but they are likely to create hybrids to attract borrowers to higher cost fixed loans.

Harsh Roongta, one of the leading financial planners, said: “Short term loans like auto loans and personal loans which are currently granted at variable rates by PSU banks in particular (most private banks are already offering mainly fixed rate auto loans and personal loans) will move to a fixed rate scheme so that banks can charge a prepayment penalty for prepayments. Indeed, it is possible that banks stop offering the pure floating rate option or make it very expensive or hide it to the point of making it unavailable. Even for mortgage loans we will see many hybrid loans where the initial term of the loan will be at a fixed rate for at least 3 years – this will again allow the banks to charge a hefty prepayment penalty in the event that the consumer wants to prepay or postpone their loan.

Banks have started to modify their loan products. Bank of Baroda, for example, relaxed the eligibility criteria and improved the amount of home loans to Rs 10 crore from the existing Rs 3 crore, as of April 1, but interest rates remain unchanged at 9, 65% for their best customers. They also increased the amount of auto loans to 1 crore rupees from April 1. The bank also increased the loan-to-value ratio of auto loans to 95% of the road value and in some cases reduced the LTV to 80% on a perceived risk. for certain categories of customers.

A Bank of Baroda official in charge of personal loans said: “The MCLR will continue to change on a monthly basis, but home loans will have an MCLR depending on when the loan is disbursed and that rate will be in effect with a one-year reset clause. “

The RBI previously exempted all fixed rate loans from the jurisdiction of the MCLR, but then issued a notification stating that only fixed rate loans up to three years would be priced with reference to the MCLR. Fixed rate loans with a term of more than three years will continue to be exempt. Even though banks will announce new MCLR rates monthly or quarterly, MCLR linked home loans will reset every year.

Bankers and personal finance experts say they expect to see a number of fixed loan products from banks, particularly on auto loans and personal loans. While most public sector banks have floating rates, in a falling interest rate regime it makes sense to keep the rates floating, and in a tightening regime it makes sense for borrowers to set their rates. of interest.

Anshula Kant, chief financial officer of the State Bank of India, told ADN last week: “We will be launching many fixed loan products like auto loans and personal loans for retail customers.” The bank that was the first to announce its MCLR was also the first to cut its mortgage rates by 0.10% as of April 1. The majority of banks have yet to announce their new reduced mortgage rates.

SKV Srinivasan, Executive Director of IDBI Bank, said: “We will wait for the announcement of the credit policy to decide on our new mortgage rates. Our Alco (asset-liability committee, a bank’s rate setting committee) will meet after the policy to announce the new rates. But customers can expect many fixed rate loan products from banks. Even the existing fixed rate auto loans and personal loans from most banks will be revived with additional features and revised interest rates. “


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