Mumbai: Borrowers could be paying less on their mortgages as banks shift to a new system of linking such loans this week to benchmarks prescribed by the central bank. That may result in lowering the cost of funding by as much as 30 basis points in some cases, experts said. A basis point is 0.01 percentage point.
State Bank of India, for instance, has pegged the spread at 2.65 percentage points above the repo rate, which is at 5.40%, resulting in an external benchmark rate of 8.05%. That will bring the effective rate to 8.20% against an 8.30% floating interest rate under the previous marginal cost of funds based lending rate (MCLR) regime for salaried home loan borrowers on loans up to Rs 30 lakh. However, there could be additional charges added on to this based on the profile of the customer.
SBINSE -3.34 % will charge an additional 15 basis points from non-salaried borrowers. Those in the higher Risk Grade (RG) 4-6 will be levied a further 10 basis points. The Reserve Bank of India said the benchmark can be the repo rate, or three-month or six-month treasury bills, or any other benchmark published by Financial Benchmarks India, which administers such rates. The central bank announced on September 4 that banks would have to link loans to retail customers and micro, small and medium enterprises (MSMEs) to external interest rate benchmarks in order to make the transmission of monetary policy more effective to boost credit growth, consumption and investment in order to revive the economy.
Banks are free to decide the spread over the external benchmark. Subsequently, risk premiums may change in line with a borrower’s credit assessment as agreed upon in the loan contract. The repo rate, at which banks borrow from the RBI, is at the lowest since February 2010 at 5.4%. The three-month T-bill rate has seen a drop of 100 bps since February and is currently at 5.28%. The six-month T-bill rate, which was at 6.4% in February, is now at 5.48%. While the repo rate has been slashed 110 basis points between February 2019 and August 2019, the drop in MCLR has only been 20 basis points.
An ICRA report said that external benchmarking on lending rates is likely to result in significant volatility in equated monthly instalments (EMIs) for borrowers. It’s estimated that a 50 basis point rise in the repo rate could lead to a Rs 2,200 increase in monthly payments on a Rs 75 lakh loan payable over 15 years. A 100 basis point climb could pinch the pocket by as much as Rs 4,500 a month.