By Snigdha Kalra
The Committee on Household Finance, set up by the Reserve Bank of India (RBI) in 2016, submitted a report on August 24, 2017. In this report, the committee suggested linking home loan rates to the repo rate, instead of the Marginal Costs of funds based Lending Rate (MCLR), to which they are currently tied.
To facilitate ease of comparison for prospective borrowers at the point of purchase, every floating-rate home loan should be quoted to prospective borrowers in the form of a market-wide standardised rate + spread as opposed to MCLR + spread, said the report.
MCLR and its shortcomings
The Marginal Cost of funds based Lending Rate, or MCLR, is a method for calculation of interest rate on loans by banks. It came into effect from April 2016, replacing the base rate method. The major advantages of MCLR include lower interest rates on loans as compared to the base rate. It leads to a uniform method for calculation of interest rates across all banks. Further, it enables a faster transmission mechanism, which means that the benefits of a rate cut by the RBI will be passed on to the borrowers more quickly.
However, these advantages have not yet come into play in a major way. According to Viral Acharya, Deputy Governor of RBI, the banks have not been passing the entire benefit of repo rate cuts to the customers. RBI cut rates by 25 basis points in the Monetary Policy Committee meeting on August 2. However, a subsequent cut in MCLR by the banks has not been observed.
Moreover, following in the footsteps of the State Bank of India, many banks have reduced their savings account rates. As such, it raises the margins for commercial banks and makes reducing MCLR an even more viable and necessary action.
RBI’s recommendations for transparency
According to the Housing Finance Committee, linking the interest rates on loans to RBIs repo rate will lead to a better and more transparent transmission mechanism. When RBI cuts rates, the banks are supposed to pass on the reduced costs to the customers, in the form of lower lending rates. However, under the MCLR regime, most of the lending rates are revised annually or semi-annually. This does not allow customers to benefit immediately from rate cuts.
The RBI has recommended the banks either to link the lending rates to repo rate or to revise the MCLR on a monthly basis. To implement the former measure, banks will have to revise their lending rates as and when the MPC decides to revise repo rate. This will result in a quicker transmission of monetary policy and a more urgent trickling down of effects. If the banks decide to implement the latter proposition, they will have to revise the MCLR every month, based on the prevailing rates. This again will result in more transparency and more efficient transmission.
However, the RBI can only suggest measures. The final decision rests with the banks. But there is hope for the public in the near future. These suggestions are sure to impact the banks to take action. Moreover, the stringent stance on the NPA crisis is set to relieve the banks, to some extent, of the growing bad loans. Thus, they will be more willing to pass on these benefits to the consumers. What their final stance will be, remains to be seen.
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