Are home buyers really getting the benefit of rate cuts by the RBI?


Are banks passing on the benefit of the RBI’s repo rate cuts to their customers? We compare the prevalent home loan interest rates of some prominent banks, with the rates at the start of the year, to get some answers

The RBI had, in June 2019, reduced the key policy rate, making it the third time in a row that it did so, in the calendar year 2019. Till June 30, 2019, the repo rate has been cut by around 0.75% in 2019. Although the RBI has reduced the repo rate by 0.75% in the last 6 months, many banks have reduced their home loan interest rates by up to 0.3%, whereas some other banks have kept their interest rates unchanged, or even hiked the rate.

 

Home loan interest rate trends in the calendar year 2019

Bank Home loan interest rate (per cent, per annum)
As on January 4, 2019 As on June 28, 2019
Allahabad Bank 8.8-9.35 8.55-9.55
Axis Bank 8.8-9.15 8.9- 9.15
Corporation Bank 8.6-9.3 8.6-9.2
HDFC Bank 8.8-9.2 8.6-9.6
ICICI Bank 9.1-9.35 8.8-9.25
SBI 8.75-9.35 8.55-9.25
UCO Bank 8.65-8.9 8.65-8.9

Note: Data taken from the respective banks’ websites.

 

Do banks reduce the interest rate immediately, after a repo rate cut by the RBI?

The answer is, no. Banks take their own time and no rule binds them to cut the interest rate, within a specified time frame. “Banks and NBFCs are very quick to raise the interest rates, which are often implemented by the next EMI itself. However, they are slow to reduce EMIs, as they face liquidity issues and do not want to hurt their cash cow,” explains Rituraj Verma, partner at Nisus Finance.

See also: Why should you obtain a credit report before buying a house?

 

Repo rate trends in the last 18 months and its impact on MCLR

In the last 18 months, some of the banks have increased the MCLR, despite a net fall in the repo rate. “There has been a 50 basis points decrease in the repo rate since last June (2018) but the MCLR has gone up by 20 basis points, in this interval. The repo rate in June 2018 was 6.25%, compared to 5.75% currently. At that time, the one-year MCLR rates of some of the leading banks were around 8.25%, compared to around 8.45% currently,” points out Adhil Shetty, CEO, BankBazaar.com.

 

Why do banks not pass the RBI’s rate cut benefits immediately to the customers?

Experts point out that not all banks and NBFCs have responded to the rate cut. Several banks that are reeling with bad debts and provisions for further write-offs, are extremely hesitant to lose income from home loan interest, as in the initial years, the largest chunk of the EMI for a home buyer, is the interest portion. Shetty adds: “Banks need to maintain a cash reserve ratio (CRR) of 4% with the central bank and a statutory liquidity ratio (SLR) of 19%, by investing in approved government securities. Currently, the credit to deposit ratio of banks has been 77% or more. It implies that after adjusting for CRR and SLR, banks are lending out almost all the deposits that they have. So, right now, they cannot reduce interest rates on their deposits, as they need fresh deposits to keep funding their loans and therefore, the interest rates on loans cannot come down either.”

 

How should home buyers select a lender, in this scenario?

It is not easy to find a lender that immediately passes on the benefit of an interest rate cut and even if one does, there is no guarantee that the lender will continue to do so, in the future. Also, even if a bank has reduced the interest rate, in sync with the repo rate cut, one needs to look at the change in the processing fee and penalties associated with the loan. Some lenders reduce the interest rate but at the same time, increase the processing fees, thus, nullifying the benefit. In the last few months, the government has expressed its displeasure against banks that do not pass on the benefit of the policy rate cut to the customers. However this problem requires the RBI’s intervention and for rules to be framed, for lenders to pass on the benefit of an interest rate cut to the borrowers, in a time-bound manner.

 

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