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The country’s largest private sector bank, HDFC Bank, has given big relief to millions of its borrowers. The bank has announced a reduction in its Marginal Cost of Funds-Based Lending Rates (MCLR) by 5 to 10 basis points (0.05% to 0.10%). The new revised rates have become effective. This decision of the bank to reduce the loan benchmark rates just ahead of the festivals and the upcoming festive season has paved the way for reduction in EMI or loan tenure for crores of existing and new customers taking loans on floating rates. However, this reduction will not be available to every customer immediately and uniformly, as it entirely depends on the reset clause and benchmark type of the loan.
According to details released on the official website of HDFC Bank, the bank has reduced its lending rates for various tenures ranging from 0.05% to 0.10%. After this amendment, the overall MCLR rates of the bank have now come in the range of 7.90 percent to 8.60 percent, which earlier was between 8.00 percent to 8.65 percent.
MCLR for overnight and 1 month tenor has been reduced by 10 basis points to 7.90% from 8.00%. The rate has reduced from 8.15% to 8.05% for a period of 3 months. At the same time, the 6-month MCLR has been reduced by 5 basis points, due to which this rate has come down from 8.30% to 8.25%. The 1 year MCLR, considered most important for retail home loans and auto loans, has been reduced from 8.40% to 8.35%. The 2-year MCLR has been cut by 10 basis points from 8.55% to 8.45%, while the 3-year rate has come down to 8.60% from 8.65%.
This question arises in the minds of most of the borrowers that as soon as the bank announces rate cut, will the amount of EMI to be deducted from the next month automatically reduce? The simple answer is: no. The rule of ‘Reset Date’ is applicable in MCLR related loans. When you take a floating rate loan from a bank, there is a reset clause in your loan agreement, which is usually for one year, six months or three months.
Suppose your home loan is linked to 1 year MCLR and your reset date falls in the month of December every year. In such a situation, you will not get the benefit of this deduction made in September, but when your loan is reset in December, your interest rate will be reduced based on the MCLR applicable at that time. If the reset date of a customer is falling in the month of September, then he will start getting the benefit of the new rates from this month itself.
This deduction is primarily beneficial for those customers whose loans were sanctioned under the MCLR regime. The Reserve Bank of India (RBI) implemented the MCLR system in April 2016. Therefore, customers who had taken loans between 2016 and October 2019 and have not switched their loans to repo-linked external benchmark (EBLR) are directly covered by this deduction. Apart from this, many corporate borrowers, MSME business loan holders and personal and commercial vehicle loan customers who are linked to MCLR will see relief in their borrowing costs.
After October 2019, under RBI rules, it was made mandatory for all commercial banks to link new floating rate retail loans (like home loans, auto loans and MSME loans) to an external benchmark, especially the RBI repo rate. If you have taken a home loan after October 2019 and your loan is based on Repo Rate Linked Lending Rate (RLLR / EBLR), then this MCLR cut by HDFC Bank will not have any direct impact on your loan. Repo-linked loan interest rates increase or decrease only when the Reserve Bank of India changes the official repo rate in its Monetary Policy Committee (MPC) meeting.
Whenever there is a cut in the interest rates on a floating rate loan, banks usually pass the benefit on to the customers in two ways. In the first arrangement, banks reduce the total tenure of the loan i.e. the remaining payment period (months) while keeping your monthly EMI amount the same, due to which your loan gets repaid before the scheduled time and interest is saved. In the second system, customers can reduce the monthly EMI amount by applying in the bank branch or through net banking while keeping the tenure of their loan the same. If you want to increase your monthly savings, you can choose to reduce the EMI.
The bank has clarified that this change in MCLR is based on the internal cost system. The bank’s base rate currently remains at 8.70 percent and the benchmark prime lending rate (BPLR) at 17.20 percent per annum. Along with this, it is a matter of relief for the fixed deposit (FD) investors of the bank that there has been no immediate change in the deposit rates due to the cut in the lending benchmark. General citizens will continue to get attractive interest rates on FD ranging from 2.75% to 6.50% and senior citizens will continue to get attractive interest rates ranging from 3.25% to 7.00%.
If you have any floating rate loan from HDFC Bank, first of all check your loan account statement or sanction letter. In that, see whether your loan is linked to MCLR, Base Rate or EBLR. If your loan is still in the old MCLR system, contact your bank relationship manager to find out when your reset date is. Also calculate whether it would be more economical to switch your loan to an external repo-linked benchmark, as repo-linked loans are often considered more dynamic for transparent interest transmission in the current financial scenario.