Bringing relief for pre-April 2016 home loan borrowers, RBI directed banks link older home loan rates to the current market-linked benchmark. The move will reduce the interest rate on home loans taken prior to April-2016.
In its new policy statement, RBI has asked banks to link the base rate to MCLR from April 1, 2018.
Prior to April-2016, home loans were linked to base rate, which was arbitrarily decided by banks. This base rate takes time to reflect rate cuts due to which borrowers were not getting the benefit of rate cuts. The RBI later introduced MCLR, which is linked to the cost of funds. While borrowers after April 2016 got the benefit of MCLR, those with older loans continued to pay as per the base rate.
The RBI has also made it clear that banks should allow base rate borrowers to switch to MCLR. The existing loans can run till maturity or borrowers can switch to MCLR on mutually agreed terms. The base rate borrowers have two options, either switch to MCLR based lending with the same bank or else transfer from another bank on MCLR mode.
What is MCLR?
Marginal cost based lending rate is an interest rate formula used by banks to set their interest rates for different loans.
Banks obtain funds for lending from deposits by customers and by borrowing from the RBI.
Under MCLR, banks will set interest rates on loans based on interest rates given for deposits and the repo rate (the rate at which bank borrows from RBI).