By maintaining status quo on its neutral stance and holding rates for the fourth consecutive time, the RBI has offered very little to borrowers. At best borrowers are likely to see some token benefits as banks tinker with lending rates, due to still abundant liquidity in the system. For depositors, while sharp cuts as seen in 2016, are unlikely, deposit rates can continue to move lower. Since the RBI’s April policy , a few public sector banks have cut deposit rates by as much as 25-40 basis points across tenures; lending rates, on the other hand, have hardly moved.

Interestingly though, borrowers who took loans under the new MCLR regime last year, have a lot to cheer in the coming months. These borrowers will gain substantially from the sharp fall in MCLR over the past year, as lending rates get reset.

Ifs and buts for borrowers

The marginal cost of funds-based lending rate (MCLR) that the central bank introduced in April last year, has created varied sets of borrowers; each are impacted differently by the RBI and banks’ rate action.

Let us consider new borrowers first. Given the steep cut in lending rates since the beginning of the year, and lesser headroom for the RBI to cut rates further, new borrowers should go ahead and shop for the best deals in the market. SBI, the largest lender has cut its MCLR by 90 basis points since January and other banks by 70-80 basis points. But much of these cuts happened in January and since then, lending rates have more or less remained unchanged. Going ahead, MCLR cuts are likely to be very few and minimal.

Within the old borrowers category there are now two sub-segments to consider. Ones that have taken loans under the erstwhile base rate system and those that have borrowed under MCLR last year.

The former have had little respite as banks have wielded the scissors on MCLR, while only tinkering with base rate by 10-20 basis points over the past year. For these borrowers, switching into the new MCLR structure can result in huge savings in EMI; switching cost and the remaining tenure of the loan however, matter.

The category of borrowers that are likely to see substantial gains in EMIs this year are those that have taken loans under MCLR—just after April 2016. This is because MCLR has moved lower by a notable one percentage point on an average across banks since last April. Under MCLR based pricing, lending rates are reset only at specific intervals, corresponding to the tenure of the MCLR. As these resets happen in the coming months, borrowers should see significant reduction in their effective loan rates and hence EMIs. In case of SBI’s home loans, for instance, since the loans are benchmarked against the one-year MCLR, lending rates will only be reset every year. In April 2016, one-year MCLR stood at 9.2 per cent. The effective home loan rate then worked out to 9.45 per cent. With one-year MCLR at 8 per cent, the effective loan rate (remember the spread will remain the same at 25 basis points) works out to 8.25 per cent from April this year.

Depositors’ woes

Deposit rates have fallen by more than a percentage point through the year across banks. While the RBI’s has held its rates for a while now, the excess liquidity post demonetisation has continued to provide leeway for banks to cut deposit rates.

In fact, surprisingly, a few public sector banks have cut deposit rates by 25-40 basis points since the April Policy. Bank of Baroda, Bank of India, Canara Bank, Central Bank of India, Corporation Bank, IDBI Bank, Punjab National Bank and SBI are banks that have cut deposits rates substantially over the past two months, in certain tenures. With liquidity still sloshing around in the system, banks may continue to lower deposit rates, adding to depositors’ woes.

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