Commerce for IAS – Demonetisation Impacts
POST DEMONETISATION LENDING RATE CUTS BY BANKS – IMPACT ON BORROWERS
Since April last year, lending rate on floating rate home loans have been pegged against a new benchmark — the marginal cost of funds-based lending rate (MCLR), instead of the erstwhile base rate. Under the new norms, banks will add a spread to the MCLR, to arrive at the loan rate.
Cheers for new borrowers
Post-demonetisation, banks have been flush with deposits and have hence resorted to slashing deposit rates. Given that MCLR uses the latest rates offered on deposits for its computation, borrowing rates are on a descent.
Over the past week, banks have been slashing their lending rates by a steep 70-90 basis points.
For new borrowers, SBI’s home loan at a spread (mark-up over MCLR) of 65 basis points currently, is the best deal for now. This means your EMI shrinks and you save some interest cost over the entire tenure of loan.
While rates will continue to fall, steep cuts are unlikely to happen again. Hence, it may be the right time to lock into some of the best deals.
Choices for old borrowers
Sadly, old borrowers — those who have taken loans against the erstwhile base rate prior to April 2016 — have not had much respite yet. This is because, while banks have been slashing MCLR, they have not lowered their base rate. To help them, banks, including SBI, are allowing borrowers to switch into the new MCLR regime, at a cost.