Loan EMIs will Hopefully Reduce

In its bi-monthly monetary policy meeting held on 7th February, the Reserve Bank of India has announced plans to reduce the key policy rates by 25 basis points (bps). One basis point is equal to one-hundredth part of a percentage. This might not be very reflective in a common man’s small loans, but it could be very beneficial of business owners and big borrowers that count every penny they spend. After the announcement, the repo rate stands at 6.25 percent and the reserve repo rate at 6.00 percent.

For the past two meetings held in October 2018 and December 2018, the Monetary Policy Committee (MPC) has changed its stance to ‘calibrated tightening’ looking at the economic conditions in the country. This meeting saw the Monetary Policy Committee change its stance to neutral signifying the upward trend in the country’s financial status. The country has already seen increments in rates twice in June and August 2018, on both occasions, the MPC had increased the rates by 25 bps. The finance committee has kept the rates unchanged since the last two meetings held in October and December 2018, the rate cuts introduced during this month’s meeting are a sign of relief for borrowers across the nation.

With the country’s apex bank lowering repo rates, it is expected that banks will also reduce their marginal cost of funds-based lending rates (MCLR). Or in other words, the minimum interest rate that a bank will charge on loans.

Assuming that the banks will pass on the rate cuts in a similar fashion, this is how your home loans EMI is likely to be impacted:

For a loan amount of 30,00,000 rupees with a tenure of 20 years the current rate of Interest was 8.8 %, but with the key rate cuts announced by RBI, the new rate of interest will be 8.55% with a 477.39 Rupees difference in the EMI of such a loan.

With the start of the new fiscal year on April 1, 2019 banks will have to use one of the four recommended external benchmarks to determine the interest rates while disbursing new floating loans such as personal, housing, auto, etc. and new loans given to micro and small enterprises.

These four recommended benchmarks are:

1. Reserve Bank of India Policy Repo Rate

2. Government of India 91 days Treasury bill yield produced by the Financial Benchmarks India Private Ltd. (FBIL)

3. Other Benchmarks rates introduced by FBIL

4. Government of India 182 days Treasury Bill yield produced by FBIL

The mark up above the benchmarks is solely to be decided by banks. However, the financial economy will be governed by the final guidelines yet to be released by the apex body, RBI regarding the same.

If your loans are linked to MCLR, your EMI burden might be lowered if the bank reduced its MCLR (marginal cost of funds-based lending rates), but you will have to wait till the reset date of your loan arrives. If you are a borrower whose home loan is still linked to the base rate or benchmark prime lending rate (BPLR), you must consider switching your loans to an MCLR based EMI system or if your bank allows you to switch to the external benchmark-based regime (with effect from April 1, 2019). Eligible new borrowers can also take advantage of the Pradhan Mantri Awas Yojna (PMAY). A NaMo scheme that offers credit-linked subsidy based on your annual income under its flagship programme ‘Housing for All.’ According to a recent PTI report, the government has extended the deadline of the scheme to March 31, 2020, from its previous deadline of March 31, 2019.

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