There is some respite for pre-April 2016 borrowers whose home loans rates have not been revised by banks in line with market rates. The Reserve Bank of India has asked lending banks to link older home loan rates to the current market-linked benchmark.
Prior to April 2016, home loans were linked to the base rate that used to be decided by banks subjectively. In order to address the complaints around the base rate not reflecting rate cuts, the RBI came up with the formula-based marginal cost of lending rate (MCLR) which is linked to the cost of funds. While borrowers after April 2016 got the benefit of MCLR, those who had taken loans before April 2016 continued to pay as per the base rate.
In its policy statement, RBI has asked banks to link the base rate to MCLR from April 1, 2018.
Another positive fallout for retail borrowers is that the scope of RBI's ombudsman schemes has been extended to cover non-banking finance companies too, making it easier for borrowers to get their complaints resolved at no cost. Home loan companies are registered as NBFCs by the RBI.
Over the 21 months since the base rate was discarded, the weighted average lending rate for banks 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. While most banks have not revised their base rates in keeping with cost of funds, SBI did cut its base rate by 30 basis points to 8.65% last month.
"The suggestion to harmonise MCLR with base rate will go a long way in improving transmission and bringing down lending rates," said Kaku Nakhate, India country head, Bank of America.
Announcing the measure, RBI deputy governor Vishwanathan said, "We are concerned about the inadequacy of monetary transmission to base rate," RBI deputy governor N S Vishwanathan told reporters. "We are harmonising the calculation of base rate with MCLR so that responsiveness of the credit portfolio to monetary policy signal is not hindered by a large part of the bank's portfolio being linked to base rate."
There is no clarity yet on how the RBI plans to harmonise the two rates. What is known, however, is that in future, loans linked to the base rate will move in line with MCLR. "RBI had earlier announced that it would bring in a new market-linked benchmark like the London-interbank offered rate (Libor). The focus on MCLR makes it appear that the new rate has been shelved," said a banker.
On bringing finance companies under the ombudsman, RBI said that initially deposit-taking NBFCs and companies having customer interface with assets of over Rs 100 cr will be brought under the ambit of the quasi-judicial body.