Your EMIs haven’t come down, here’s why

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If you have taken home loans from a major private bank and the EMI has not come down further since the pandemic, you might lay the blame at the door of your bank.

Private banks have often been accused of not passing on the benefits of the Reserve Bank of India cutting key interest rates to infuse liquidity in the system, especially in the last one year when the economy was ravaged by the pandemic.

Dip in Repo rates

The RBI slashed repo rate — the key rate that determines all the lending rates of the commercial banks — as many as 5 times in 2019 and twice in 2020. While it was 6.50% in January 2019, it was slashed to 4% in May 22, 2020 – a dip of 150 basis points in 17 months. (Repo rate is still at 4%)

However, private banks have not brought down their MCLR (marginal cost of funds-based lending rate) to the extent public sector banks have.

It is reported that the average drop in lending rates of major private sector banks such as Axis and ICICI was only to an extent of 0.22% or 22 basis points.

MCLR

MCLR is the internal benchmark rate that banks use to determine interest rate on floating rate loans such as home loans. Usually, the 6-month MCLR and 1-year MCLR are taken into account while fixing lending rates of retail loans.

The 6-month and 1-year MCLR for ICICI Bank now stand at 7.25% and 7.30%, while that of HDFC stand at 7.05% and 7.20% respectively.

Kotak Mahindra has 7.25% on both tenures. The same rates for Axis Bank are 7.35% and 7.40% while those for SBI are clearly lower – 6.95% and 7%.

The RBI database shows that while overnight MCLR rates for public sector banks range between 6.55% and 7.05% the range for private banks is 6.35%  to 8.36%.

Difficult task

Private sector banks admit they have not been able to reduce MCLR like PSU banks have.

Data from the RBI website reveal that for the quarter ending December 2020, the MCLR ranged from 6.55% to 7.15% for public sector banks. But for private banks the minimum and maximum levels were 6.35% and 8.36%.

“It is difficult for private banks to bring down the MCLR like PSU banks do. The rule of the thumb says we add at least a 2.5% net interest margin to the rates of the fixed deposit for the same tenure. Otherwise, the operations that we have and the scale of digital systems that we maintain will not be feasible,” said a senior manager of HDFC Bank on conditions of anonymity.

“Cost of funds make the difference between us and PSU banks that offer lower interest rates on FDs. We offer higher rates and we have to cover for increased cost of funds,” said an official of ICICI Bank.

Sometimes, bargain works

However, Arindam Saha, a finance professional from Mumbai said that private banks sometimes agree to reduce lending rates if one can bargain. “I was offered home loan rate by Federal Bank for 7.5% when the ticket rate was 8.2%. A friend of mine was offered a rate of 7.1% when the template rate was 8.2%,” said Saha.

“The cost of funds of public sector banks are lower compared to that of private sector banks. They also offer lower rates on FDs of the same tenures compared to private banks,” said the official of ICICI Bank.

In the recent past, banks have been frequently accused of not passing on the benefits of a rate cut to borrowers by real estate bodies too.

CREDAI stance

In end-May 2020 the association of real estate players CREDAI wrote to RBI alleging that banks are not passing the benefit of lower interest rates to those taking home loan. The body even urged RBI governor Shaktikanta Das to instruct banks to transfer the rate cuts to housing finance and non-banking finance companies so that the funds flow to the real estate sector severely impacted by the pandemic.

Despite the reduction in repo and reverse repo rates to infuse liquidity in the system, the housing and real estate sector could not derive the benefits, CREDAI complained.

“While RBI has reduced 2.50 per cent in repo rates since January 2019, the maximum reduction passed on by banks to the borrowers has been between 0.7-1.3 per cent, largely from August 2019 till date. In some cases, however, no benefit of repo rate reduction has been passed on at all,” CREDAI said in the letter.

Economic Survey

According to the Economic Survey 2019-20, borrowers could not benefit from the reduction of repo rates by RBI.

The survey said that the weighted average lending rate of commercial banks did not come down in 2019 though the central bank reduced repo rates by 135 basis points in different tranches beginning January 2019.