## Revised Interest rates by banks as per MCLR.

Earlier were the days when banks used to play around with the interest rates. With the new introduction of interest rate calculation by RBI, since April 1, 2016, the competition amongst banks is running on a high speed.

Banks have to review their interest rates every month and publish on a pre-announced dates. Also, full-fledged review of the customer’s  risk profile is high in priority before lending the loan amount and in deciding the spread and the final interest rate.

So, how is it advantageous to customers?

Solution to this question lies within the following question.

Did banks ever observe the change in base rate and implement in their interest rate?

To make it practical…imagine you borrowed loan amount at 10%  interest rate. Out of which, say, 9.5% is base rate and 0.5% is spread.  If RBI changes the base rate to 9%, your interest rate is supposed to be 9.5% (9% +0.5%). But what happens in reality, the banks with unknown reasons, increase the spread. Instead of 0.5%, the banks can take a chance to increase the spread to 1%.

Now, with MCLR in existence, banks should consider the customers risk profile in detail, to decide on spread. Banks can’t easily get arbitrary with spread changes.

What will be the impact of 0.25% lesser interest rate on home loans?

The longer the remaining tenure, greater the impact. The saving can be in hundreds per month. But, when you calculate you end up saving atleast a month’s EMI.

A cut in small savings rate is likely to bring down bank deposit rates and ultimately lead to a drop in lending rates as well.

The other aspect,

For a borrower in April 1 get loans at the prevailing MCLR (9.3%), but a month later a new borrower might get a loan at a lower MCLR if the cost of funds drops. For the April borrower, it will take three more quarters for his loan to get reset. In other words, there could be 12 sets of one-year MCLR if cost of funds change every month.

Corporate customers are also likely to look at shorter term loans to take advantage of falling rates. This will mean that banks which borrow for longer terms but have give term loans will face an asset-liability mismatch – though the only issue there is that bank earnings become volatile, they don’t usually face a crisis because of that.

Observe the revised interest rates by various banks..

Bank / NBFC Current Base Rate, PLR New MCLR April 2016 Latest Update
Allahabad Bank 9.70% 9.30% – 9.60% 01st Apr 16
Andhra Bank 9.75% 29th Sep 15
Axis Bank 9.50% 9.10% – 9.65% 01st Apr 16
Bajaj Finserv (PLR) 20.16% 01st May 14
Bank of Baroda 9.65% 9.00% – 9.35% 01st Apr 16
Bank of India 9.70% 9.15% – 9.40% 01st Apr 16
Bank of Maharashtra 9.70% 9.10% – 9.65% 01st Apr 16
BNP 9.50% 23rd Sep 13
Canara Bank 9.65% 9.00% – 9.45% 01st Apr 16
Catholic Syrian Bank 10.50% 01st Dec 11
Central Bank of India 9.70% 08th Oct 15
Citi Bank 9.25% 12th Oct 15
City Union Bank 10.50% 01st Nov 15
Corporation Bank 9.65% 08th Oct 15
DBS Bank 9.10% 01st Feb 16
Dena Bank 9.70% 9.30% – 9.60% 01st Apr 16
Deutsche Bank 9.20% 19th Oct 15
Development Credit Bank 10.70% 14th Dec 14
Dhan Laxmi Bank 11.40% 03rd Nov 15
DHFL PLR 18.30% 08th Oct 15
Edelweiss PLR 17.50% 30th Nov -1
Federal Bank 9.63% 9.14% – 9.60% 01st Apr 16
GIC Housing Finance PLR 15.00% 30th Nov -1
HDFC PLR 16.30% 05th Oct 15
HDFC Bank 9.30% 8.95% – 9.35% 01st Apr 16
HSBC Bank 9.10% 09th Nov 15
ICICI Bank 9.35% 9.40% – 9.70% 01st Apr 16
IDBI Bank 9.75% 30th Sep 15
IIFL PLR 17.50% 01st Apr 14
Indiabulls PLR 17.05% 08th Oct 15
Indian Bank 9.65% 9.20% – 9.70% 01st Apr 16
Indian Overseas Bank 9.90% 9.50% – 9.90% 01st Apr 16
IndusInd Bank 10.60% 19th Oct 15
Jammu and Kashmir Bank 9.50% 05th Oct 15
Karnataka Bank 10.25% 8.95% – 9.20% 01st Apr 16
Karur Vysya Bank 10.40% 05th Oct 15
Kotak Bank 9.50% 8.90% – 9.65% 01st Apr 16
Lakshmi Vilas Bank 10.55% 08th Feb 16
LIC Housing Finance PLR 14.20% 10th Oct 15
Nainital Bank 9.75% 21st Oct 15
OBC 9.70% 30th Sep 15
PNB 9.60% 9.15% – 9.55% 01st Apr 16
PNB Housing Finance 14.35% 27th Apr 15
Punjab and Sindh Bank 9.75% 05th Oct 15
Ratnakar Bank 10.65% 16th Oct 15
Reliance Capital PLR 18.00% 01st Nov 15
SBBJ 9.70% 05th Oct 15
SBI 9.30% 8.95% – 9.35% 01st Apr 16
South Indian Bank 10.00% 9.50% – 10.00% 01st Apr 16
Standard Chatered Bank 9.50% 8.45% – 9.65% 01st Apr 16
State Bank of Hyderabad 9.75% 08th Oct 15
State Bank of Mysore 9.65% 07th Oct 15
State Bank of Patiala 9.65% 05th Oct 15
State Bank of Travancore 9.95% 05th Oct 15
Syndicate Bank 9.70% 9.65% – 9.65% 01st Apr 16
Tamilnad Mercantile Bank 10.40% 15th Oct 15
UCO Bank 9.70% 05th Oct 15
Union Bank of India 9.65% 9.25% – 9.45% 01st Apr 16
United Bank of India 9.65% 12th Oct 15
Vijaya Bank 9.65% 08th Oct 15
Yes Bank 10.25% 9.00% – 9.60% 01st Apr 16

To know more about MCLR, its calculation and the difference between base rate and MCLR, refer the following link.

## MCLR and Base Rate.

What is going viral this April 1st?

Don’t think it to be a fool game. It’s real. SBI, the pioneer had taken initiation to announce the news of execution.

There is a press release on september 2015 by RBI w.r.t the banks interest rate calculation to improve transparency in the methodology followed by banks for determining interest rates on advances.

Till today (March 31st, 2016), the calculation is based on base rate system which includes the following factors

A) Cost of Deposits

B) Negative carry on CRR and SLR

D) Average Return on Networth.

The highest weightage is given to Cost of Deposits.

However, it was not mandatory that all the banks should have the same base rate. There were different methods that were followed.

The new concept is that banks HAVE to lend using rates linked to their funding costs. A bank raises money through deposits, bonds and wholesale borrowing. It has costs like salaries, rents, electricity costs etc. It also has to make a certain amount of profit at the very least. So the RBI has put all of this into a formula that banks can use to quantitatively determine how much their lending rate should be.

The new method MCLR(Marginal Cost of funds based Lending Rate) mentions a particular method to be followed. Following are the main components of MCLR.

A) Marginal cost of funds

B) Negative carry on account of CRR

C) Operating costs

Here, the highest weightage is given to the marginal costs.

Know the meaning of the above terms to understand why this method is powerful and transparent when compared to earlier methods, viz., base rate system and BPLR.

Negative carry on account of CRR is the cost that the banks have to incur while keeping reserves with the RBI. The RBI is not giving an interest for CRR held by the banks. The cost of such funds kept idle can be charged from loans given to the people.

Operating cost is the operating expenses incurred by the banks

Tenor premium denotes the higher interest that can be charged from long term loans.(means 1 year rate is higher than 6 month rate, etc)

Marginal Cost: The marginal cost is the novel eleme
nt of the MCLR. The marginal cost of funds will comprise of Marginal cost of borrowings and return on networth.  According to the RBI, the Marginal Cost should be charged on the basis of following factors:

1. Interest rate given for various types of deposits-  savings, current, term deposit, foreign currency deposit
2. Borrowings – Short term interest rate or the Repo rate etc., Long term rupee borrowing rate
3. Return on networth – in accordance with capital adequacy norms.

The marginal cost of borrowings shall have a weightage of 92% of Marginal Cost of Funds while return on networth will have the balance weightage of 8%.

According to the RBI guideline, “Banks will review and publish their MCLR of different maturities every month on a pre-announced date.” Such a monthly revision will compel the banks to consider the change in repo rate change if any made by the RBI during the month.

Inspite of severe emphasis laid by the RBI governor, Raghuram Rajan, to the banks to pass on interest rate cuts, less than half had been passed on to consumers this year. This made the necessity to invent this method.

Now with MCLR, banks are obliged to readjust interest rate monthly. This means that such quick revision will encourage them to consider the repo rate changes.

The final lending rate will be MCLR + Spread. (Earlier, Base Rate + Spread.)

While these guidelines will benefit new customers, existing customers will also have an option to shift to the new regime with some conditions.

SBI’S Announcement.

At SBI, the MCLR for loans upto one year maturity will be lower than its current base rate of 9.30% while those on two year and above maturity will be marginally above its base rate.

According to the statement on the bank’s website, the MCLR for overnight loans will be 8.95%, for one-month at 9.05% and for three-month at 9.10%.

The MCLR on 6-month loans will be 9.15% and for one year loans the rate would be 9.2%, the bank said.

Further the bank’s MCLR for two year loans would be at 9.3%. Loans with three year maturity would carry an MCLR of 9.35%, the bank said.