State Bank of India (SBI) and Axis Bank on Monday increased their marginal cost of funds-based lending rates (MCLR) by 10 and 5 basis points (bps) across tenures, in a clear sign that the rate cycle has turned amid inflation woes. The country’s largest public-sector lender’s decision will come into effect from Friday, while Axis Bank’s revised rates come into effect from today.
MCLR is the minimum rate at which banks are allowed to lend and the actual rate for a borrower is more than this as financial institutions factor in the marginal cost of funds, operating costs, negative carry on account of Cash Reserve Ratio (CRR) and tenor premium.
For SBI, the one-year MCLR now stands increased to 7.10 percent from the previous 7 percent. MCLR on the loans of other tenures now also stands increased by 10 bps. The overnight MCLR now will be at 6.75 percent from the previous 6.65 percent. A three-year loan would have an MCLR of 7.40 percent per annum and a two-year loan would have 7.30 percent. The loans for shorter tenures such as six months, three months and one month would be 7.05 percent, 6.75 percent, and 6.75 percent, respectively.(Please refer to the table below).
Earlier, the state-owned Bank of Baroda had also raised its MCLR by 5 bps, with effect from April 12.
A related sign of rate cycle turning has been banks increasing fixed deposit (FD) rates. The SBI had in mid-February also increased interest rates on FDs for tenures above two years by 10-15 basis points. Last week, India’s largest private sector lender HDFC Bank had also raised its interest rates on FDs that have a corpus of less than Rs 2 crore. The interest rate for different tenures has been raised by 5-10 basis points.
What it means for borrowers?
BankBazaar.com’s CEO Adhil Shetty says, “Before October 2019, all retail loan rates were linked to the MCLR. Now, with MCLR rising, those loans will get costlier. Borrowers can expect that their MCLR-linked loans such as home loans taken before 2020 would see a rate increase at their next reset. For MCLR-linked loans, the resets typically happen once in six or 12 months, as agreed upon in the loan agreement. An increase in loan rates is inevitable. When that happens, your loan tenure will increase by some number of months, which would extend the time you remain in debt.”
How borrowers can hedge against the higher cost of loan?
Shetty lists following options, “One: refinance to a lower rate. If your ongoing rate is substantially higher (25-50 basis points) or more than market rates, consider a refinance or balance transfer. Two: increase your EMIs every year as your income rises. The additional amount you pay acts as a micro pre-payment and shaves off months off your loan, thus softening the blow of the rate hike. Three: pre-pay whenever you can. One additional EMI paid every year could reduce many months off your loan.”
First Published: IST