Post Demonetisation every bank was flooded with the liquidity, the first impact was a cut in the deposit rates followed by steep 80-90 basis point( one basis point or BP is one hundredth of a percentage point) cut in it Marginal cost of fund based lending rates(MCLR). That cut though does not means that the customers will pay close to 1% less interest on the loans. Banks did cut the lending rate (MCLR), but hiked the so call SPREAD between the lending rate and home loan rates, effectively reducing the benefits of the rate cut to the customers. Though RBI has linked base rate to marginal cost of funds, further linking it to repo rate, the spread over the MCLR is still under the control of the Banks and FI.
Spread on the MCLR is your final rate of interest after adding some % to Base Rate linked to MCLR. It is calculated based on the tenure premium, credit loss, profit requirement of bank, operating cost of the bank and risk assigned with individual customer. So each bank’s Base rate may be fixed for all customers. But remember that you may end up with either paying high interest rate or low based on the spread bank charges to each individual. There is no cap on how much should be spread on and above MCLR. But charged spread need to be justifiable. Hence your banks may use this tool to charge you more by modifying spread as no regulation on this. Even though RBI says spread must be constant over the period of loan but remember to check it whenever the raise in your loan EMI. You need to verify whether the raise in EMI is due to hike in MCLR or Spread.
Some giants in the public sector banking announced the rate cut by 90bps but then hiked the spread from 20-25bps to 60-65bps; some private banks announced a rate cut of 70bps but then hiked the spread from 20-25 bps to 45-65 bps. Though the cut in this lending rate immediately reduced the deposit rated of the customers but the subsequent rise in the SPREAD didn’t not give the expected reduction in home loan rates.
Some Disadvantages of MCLR
- Spread on MCLR – Though RBI has linked base rate to marginal cost of funds, further linking it to repo rate, the spread over the MCLR is still under the control of the Banks and FI.
- Interest Reset dates – The change in MCLR will only be reviewed on the predefined reviewal dates irrespective of changes in Repo Rate at any point of time.
- Switch Charges for MCLR- The borrower who has taken the loan in base rate regime have to pay a switch fee which is a percentage of principal outstanding to avail the benefits.
- Not applicable to all class of borrower- MCLR is only applicable to floating rate of Interest. The concept will not be applicable for borrower on fixed rate as well as borrower availing personal loan or auto loans.