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Bank of India (BOI), one of the leading public sector banks, has given a big blow to its borrowers and announced an increase in the Marginal Cost of Funds Based Lending Rate (MCLR). After this step of the bank, the benchmark rates fixed for various tenures have increased, due to which customers related to personal loan, auto loan and old home loan will see a direct increase in the monthly installment i.e. EMI. The main reason for the bank to reprice its lending rates is said to be the rising cost of funds and to protect the Net Interest Margin (NIM) in the current quarter. Banking experts believe that due to the competition to raise deposits in the banking sector and the increase in the cost of funds after the recent monetary review, after this initiative of Bank of India, other major government and private banks are also preparing to increase their lending rates.
Under the revised rates released by Bank of India, the 1-year MCLR rate, considered the most sensitive, has been increased to 8.80%. Since most auto loans, personal loans and floating rate retail loans of banks are linked to the 1-year MCLR benchmark, any increase in the rate for this period is directly applicable on the reset date. For example, if a customer’s old home loan of ₹30 lakh or car loan of ₹10 lakh is MCLR based, his monthly EMI will increase once the reset cycle is completed or the banks will extend the total tenure of the loan. At the same time, MCLR rates for overnight, 1 month, 3 months and 6 months for short-term needs have also been changed after review, which will impact businessmen using corporate and working capital limits.
Banking sector experts say that when a big government bank starts increasing its lending rates, it is a clear signal for the entire banking system. At present, the pace of deposit growth (increase in deposits) in the banking system remains relatively slow as compared to credit growth (demand for loans). Banks are already offering high interest of 7.5% to 8.0% on Fixed Deposits (FD) to attract customers, due to which the cost of raising their capital of banks is continuously increasing. To bridge this gap, State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda (BoB) and private sector ICICI and HDFC Bank may also increase their MCLR rates by 5 to 10 basis points in the coming weeks, which will make borrowing more expensive after the festive season.
In this whole matter, it is very important to understand which category of customers will be affected by increasing MCLR by Bank of India or any other bank. As per Reserve Bank of India (RBI) regulations, all new floating rate retail loans (like home loans and car loans) approved after October 1, 2019 are linked to the External Benchmark Lending Rate (EBLR/RLLR), which is directly based on the RBI repo rate. If you have taken a floating home loan after October 2019, the increase in the bank’s MCLR will not have a direct impact on your EMI, unless there is a change in the RBI policy rates. But for old customers whose loans were sanctioned between 2016 to 2019 and are still running under the MCLR system, their interest rates will increase as soon as the reset date arrives. Apart from this, corporate loans and many types of fixed tenure personal loans will be directly affected by MCLR.
In this cycle of rising interest rates and expensive EMIs, common borrowers need to pay immediate attention to their financial planning. First of all, customers should check their loan account statement to see whether their loan is linked to MCLR or repo-linked (EBLR). If your loan is still running on the old MCLR and is charging higher interest, apply for immediate shift of the loan to External Benchmark (EBLR) from your existing bank by paying a nominal conversion fee. The second step could be to make partial prepayment of your loan, if you have any additional surplus funds or annual bonus available. Due to reduction in the principal amount, the interest burden will reduce and the increase in EMI will not have a heavy impact on your monthly savings.