Most of the banks in India recently hiked their Marginal Cost of Lending Rates (MCLR) by 5-10 basis points. And with the banks stepping up their MCLR, housing finance institutes are also following suit. It is although not yet clear whether the hike is the one for the long term or just the beginning of a trend of periodic increase in basis points. It may behove the home buyers planning on borrowing from financial institutes such as banks, keeping in mind this factor.
It is evident from the rise in the 10-year G-Sec yield that the interest rates within the economy are poised to go upwards. In end-July 2017, there was a hike of the 10-year G-sec yield, from 6.41% to 7.40%. The current value is at 7.29%. Financial institutes that have exceeded their Statutory Liquidity Ratio (SLR) requirement, due to investment in G-Secs, are several in numbers. Thus, to make up for the margin, a hike in the MCLR seemed to be the only logical way forward for them.
In this regard, banks have also raised their cost of funds effectively. According to sources, banks who have recently increased their fixed deposit rates have done so to push the cost of funds higher up. Given the factor the cost of funds plays in the MCLR, the valuation of the latter has seen an uptick. This has also resulted in a lacklustre deposit growth, causing banks to pay more to secure funds.
Borrowers looking to turn to financial institutions for a help out should learn to track liquidity and inflation to get a handle on how the interest rests should go in the future. The impact of the hike on customers depends on whether the loan is benchmarked against the base rate of MCLR. However, some banks have neither raised their base rate nor their MCLR. The main takeaway from the scenario right now is that the majority of the impact shall land on new loan applicants, while the existing applicants shall not have to bear the brunt of the market changes till their next interest date commences.
It would be prudent on the part of interest-payers to make an advance prepayment on their forthcoming loan interest, should they have money to spare. Alternatively, those who are weary that they will end up spending their excess funds, should consider smart home loans as an option, since the latter have their own overdraft facility. Once the excess funds are transferred to that account the principal decreases, while also providing the loan applicant the chance to have a bankable fund on which they can fall back.
Borrowers need to be sanguine about the interest rate that is being offered to them by the lender. If the difference in rates offered to you by different financial institutions is too high, try to stick to your current financial institution and avail their best rate. If their best rate is not the best offer on the market, then it’s time to switch to another financial lending institute. If the MCLR continues to hike, the impact at the next instalment of interest could be great. If the bank hikes the loan tenure instead of the EMI, the total interest outflux also increases. If possible, speak with your bank to increase the EMI instead of the loan tenure, and it may be more cost-effective in the long run.
(By Honey Katiyal, Founder & CEO, Investors Clinic)