Recently, RBI declared its new cut rates affecting the borrowers and investors in opposite visions. The RBI cut rate is found to be a gift to the borrowers and mere sad news for the investors.
This reduction in lending rates will be definitely for the betterment of the loan taken, planned, and EMI schedules of many individuals. But it will adversely affect the people dependent on their fixed money which earlier gave them better profit than now. Especially the people who have this loan interest as their primary and sole income.
RBI has decreased the repo rate and reserve repo rate by 35 basis points (bps) respectively. This is the fourth time RBI has taken such a step in this year itself. All the changes are applicable from February 2019. (Please note that one basis point is equivalents to one hundredth part of one percent.)
Earlier decrease of 25 basis points each time adds up to a total decrease of 110 basis points in key policy rates by the Central Bank. In recent criteria, the repo rate stands at 5.40 percent whereas reserve repo rate stands at 5.15 decreased from 5.50 and 5.75 respectively.
Now Fixed Income Returns Will be Reduced
Not only the decrease in key rates, but the changes also involve the drop in interest rates on fixed deposits. State Bank of India recently has reduced the interests for a shorter duration of deposits ranging up to 179 days by 50-75 bps. For a greater period drop of 20bps is applicable. This will be applied from 1st August 2019. Further reduction of 10bps is also imposed on the small saving schemes.
When talking about the rupees loan, the bank has reduced 29 bps on WALR i.e. weighted average lending rates. This will affect the home loans. SBI also dropped its marginal cost of funding based
Reduction in Home Loan Interest Rates
In general, banks have made the reduction by 29 bps on new rupee loan in their weighted average lending rates (WALRs) in the prevailing phase of Feb-Jun 2019.
“The Reserve Bank of India’s decision to cut rates by 35 basis points is a positive decision. The move to allow banks to lend to priority sectors, including to housing sector of up to Rs. 20 lakh loans, through NBFC arms will kickstart credit flow especially to affordable housing sector. For the consumers to feel the benefit of lower rates, the RBI will now need to step in for accelerating transmission of the rate cut,” said Ravindra Sudhalkar, ED & CEO, Reliance Home Finance.
From 1st July, SBI will offer its customers with the availability of home loans linked with repo rates. Not only SBI but also HDFC banks reduced their lending rates by 10bps recently, for both new and existing users.
The saving bank account holders of SBI with the balance over Rs. 1 lakh will be earning the interest rate of 2.65% only on their balance in saving accounts. Various banks have already started cutting rates on loans.
Rate Cut Impact on Existing and New Borrowers
The fourth time rate cut is indeed good NEWS for borrowers. It will result in lowering the EMIs (equated monthly installments).
Have a look on an instance impacting HOME LOAN EMIs
| Loan Amount (₹) | 3000000 |
| Tenure (Years) | 20 |
| Current Interest Rate (%) | 8.50 |
| Current EMI (₹) | 26035 |
| New Interest rate (%) | 8.15 |
| New EMI (₹) | 25374 |
| Cut in EMI (₹) | 661 |
Ref: SBI website
EFFECT ON BORROWERS:
- The reduction of bps in various loan aspects is cherishing news for the borrowers. This will result in a decrease in EMIs and the amount of consecutive EMIs.
- The existing customers may feel relieved about the new rates after the application of their rules by bank in recent months.
- Also, the users having their loans BPLR linked basis would now have a chance to change them to the MCLR linked loans which would be highly beneficial for them.
- The other option for these users apart from switching their loan type would be avail for other banking options.
- The home loan bearers may have a feeling of relief as they can prepay their installment with the availability of money with them.
- For the new borrowers, the available options for the loan will either link their loans with the MCLR linked options or on the basis of Repo rates.
- Credits are also made available based on Pradhan Mantri Awas Yojana depending upon the type of residential plot for which you need the loan. This may vary from bank to bank. The benefit of interest subsidy for Middle income group – I (MIG -I) and middle income group – II (MIG -II) is available till March 31, 2020.
Now a new borrower has the option to choose from the home loan linked with repo rate or MCLR. Customers are strongly recommended to make a clear comparison and check the applicable terms and conditions before making his/her personal decision to enjoy the benefit of cut rates on loans.
Thus, the overall effect of cut rates by RBI is a mixed criterion.