Facts about MCLR and its impact
Sep 07, 2017 Real Estate News
The banking sector has gone various changes to make sure the buyers are at the advantage. The recent change is the change in the lending rate method from Benchmarking Prime Lending rate (BPCL) to Marginal Cost Lending Rate (MCLR). As per the Reserve Bank of India, the existing base rate system will be replaced by MCLR that is the marginal cost of fund-based lending rates (MCLR) from April 2016. The new system shall be used for deciding the lending rates for commercial banks. But any kind of change in the interest rate has a direct impact on the buyers. Here is how this change will affect the buyers.
Let’s understand various components of MCLR
MCLR is the new lending rate based on which borrowers will be provided with the loan. It has four main components.
1. MCF or Marginal Cost of Fund: it is an additional cost of lending more money such that the bank’s average cost of funds remains as it is. In terms of banks, it is referred to the marginal borrowing cost and its return on net worth.
2. Negative carry on account on the cash reserve ratio: Cash reserve ratio is the proportion of the total deposits that the banks have to park with RBI in cash and other liquid assets. The cost of such funds kept idle can be charged from the loans given out to the people.
3. Tenure premium: It is the amount that keeps increasing with the loan period.
4. Operating cost: It is the cost of providing loan products that include the cost of raising funds along with the cost of operating a banking company.
RBI asked the banks to set up the MCLR rates wither monthly or yearly. This means that the buyer will have the new interest rate on the home loan at pre decided time. Banks are also allowed to determine their speed higher than MCLR, depending on the credit risk and loan tenure.
Marginal means additional. It means that the banks will have to consider the additional or changed cost condition which will affect the MCLR at when the loan is given.
If the buyer plans to take a loan based on floating rate of interest than the MCLR will be attached to it. For a floating rate of interest, it is advised to go through the reset clause at the pre- specified time interval.
Impact
The major change that MCLR has brought to the banking industry is that the banks will have to consider the changes in repo rate when calculating MCLR. Under the previous regime, the repo rate cuts were done occasionally since there was no specified time. But with MCLR they will be done in every specified period.
The loan rates will be competitive with MCLR which will help the borrowers reap the benefit of the lower charges. There will also be more transparency in the methods that are followed by banks which will be fair to the buyers.
Buyers may find the change in the rates confusing at first but with a thorough study and proper information, it will be easier in long run.
Let’s understand various components of MCLR
MCLR is the new lending rate based on which borrowers will be provided with the loan. It has four main components.
1. MCF or Marginal Cost of Fund: it is an additional cost of lending more money such that the bank’s average cost of funds remains as it is. In terms of banks, it is referred to the marginal borrowing cost and its return on net worth.
2. Negative carry on account on the cash reserve ratio: Cash reserve ratio is the proportion of the total deposits that the banks have to park with RBI in cash and other liquid assets. The cost of such funds kept idle can be charged from the loans given out to the people.
3. Tenure premium: It is the amount that keeps increasing with the loan period.
4. Operating cost: It is the cost of providing loan products that include the cost of raising funds along with the cost of operating a banking company.
RBI asked the banks to set up the MCLR rates wither monthly or yearly. This means that the buyer will have the new interest rate on the home loan at pre decided time. Banks are also allowed to determine their speed higher than MCLR, depending on the credit risk and loan tenure.
Marginal means additional. It means that the banks will have to consider the additional or changed cost condition which will affect the MCLR at when the loan is given.
If the buyer plans to take a loan based on floating rate of interest than the MCLR will be attached to it. For a floating rate of interest, it is advised to go through the reset clause at the pre- specified time interval.
Impact
The major change that MCLR has brought to the banking industry is that the banks will have to consider the changes in repo rate when calculating MCLR. Under the previous regime, the repo rate cuts were done occasionally since there was no specified time. But with MCLR they will be done in every specified period.
The loan rates will be competitive with MCLR which will help the borrowers reap the benefit of the lower charges. There will also be more transparency in the methods that are followed by banks which will be fair to the buyers.
Buyers may find the change in the rates confusing at first but with a thorough study and proper information, it will be easier in long run.
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