SBI hikes interest rate on housing loans; EMI to rise for existing borrowers

SBI MCLR: State Bank of India (SBI) has hiked the loan interest rates based on the Marginal Cost of Lending Rate (MCLR) by 10 basis points w.e.f. from February 15. One basis point is equivalent to a hundredth of a percentage point. The decision will increase EMIs for existing borrowers and also make borrowing costlier.

SBI’s decision to hike MCLR follows the 25 basis point increase in the repo rate by the Reserve Bank of India (RBI) to 6.50 per cent last week.

According to the official website of the lender, the overnight MCLR has been hiked from 7.85 per cent to 7.95 per cent. The MCLR for a one-month tenor has been increased from 8 per cent to 8.10 per cent. The three-month MCLR has been raised to 8.10 per cent from 8 per cent.

The six-month MCLR now stands at 8.40 per cent, according to the bank’s website. The one-year, two-year and three-year MCLR have been increased to 8.50 per cent, 8.60 per cent and 8.70 per cent, respectively.

What is MCLR?

MCLR is the base rate set by banks as per the new RBI guidelines. It replaced the earlier base rate system to determine rates of interest for loans. RBI implemented MCLR on 1 April 2016.

MCLR basically defines the process used to determine the minimum loan rate of interest. Simply put, it is the lowest rate that a bank or lender can offer but there are certain exceptions laid down by RBI.

Most of consumer loans, including home, auto and personal loans are tied to MCLR.

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MCLR in Home loans

MCLR is closely associated with the repo rate and fund costs of the bank, thus if there is a change in the repo rate it has an impact on the floating home loan rate.

RBI’s Guidelines on MCLR:

-Fixed rate home loans will not be affected by MCLR.

-Deposit balances and other borrowings are considered while computation of marginal cost of funds.

-Banks must publish marginal cost of funds-based lending rates for different tenors.

-MCLR as on the sanction date of the floating rate home loan will stand the same till next reset date.

How does MCLR rate change affect borrowers?

MCLR allows the revisions in interest rates done by RBI to be transmitted faster to the borrower, with monthly updates to the MCLR. So, when RBI cuts the rate the borrowers benefit within a relatively shorter time frame.

In addition to quick transmission, greater transparency was also an objective to bring MCLR.

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