Quite often we get confused between the various interest rates for home loans like MCLR, RPLR, BPLR, and Base Rate. Let us have a look at all of them so you would know what they are and what it means to you for your benefit.
MCLR stands for Marginal Cost of Lending Rate. It is the rate at which commercial Banks like ICICI Bank, Axis Bank, etc provide home loans to the customers.
RBI mandates Banks to use the MCLR rate for new Loans. As it was seen that reductions in RBI Rates were not effectively passed on by the Banks using the earlier mechanism of Base Rate.
Loans are sanctioned with a spread of a few percentage points (addition) based on the profile of the customer and Banks current policies. Bank cannot change MCLR’s spread during the entire loan tenure until customer requests for the same.
RPLR stands for Retail Prime Lending Rate. It is the rate at which NBFCs like HDFC Ltd, LIC HFL or PNB HFL, etc provide loans to the customer.
They provide loans at some discount to their current RPLR. NBFCs decide RPLR based on their cost of funds which sometimes may not be transparent to customers.
Banks used to disburse home loans at mark up to Base Rate from Jul’10 till Mar’16. This Base rate used to be the minimum at which Bank can provide the Home loan to its customers as mandated by RBI. This was changed to MCLR based funding as per the directive of the RBI.
BPLR full form is Benchmark Prime Lending Rate. It used to be the rate on the basis of which commercial Banks and NBFCs provided loans before 1 July 2010.
Currently, BPLR is not popular. As RBI now mandates Banks to lend on MCLR instead of Base rate / BPLR.
The problem with BPLR was that it was not transparent and Banks used to misuse it. They used to onboard new customers with lower interest rates. But keep the higher interest rates for the existing customers.
Thus the benefit of reducing the Interest rate by RBI was not passed on to them by lowering BPLR. Instead spread on BPLR used to change to only benefit new customers.
Let us understand these rates like RPLR, MCLR more
In general, we tend to choose the one which is providing the lowest home loan rates. But sometimes it may not turn out to be a wise option. As over a period of time, the Financial Institution may charge you higher than the general trend.
Before we talk about different Rates, let’s first have a quick look at the types of institution that provides Home Loans. And yes it is important! You might believe taking a home loan from ICICI, Axis or HDFC is the same. No, it is not.
While ICICI Bank and Axis Bank home loans are from Bank itself, home loans from HDFC are Not! It comes from HDFC Ltd (a Housing Finance Company) and not HDFC Bank, its sister concern. Banks like SBI, ICICI Bank, Axis Bank, etc are governed by RBI. Whereas the HFCs like HDFC Ltd, LIC Housing Finance, DHFL, etc are not.
HFCs (Housing Finance Companies) provides loan at RPLR/BPLR –
HFCs like HDFC Ltd, LIC HF, PNB HFL, etc provide Home loans with a discount to RPLR/BPLR which is set and changed time to time by them.
National Housing Bank (NHB) governs the Housing Finance NBFCs like HDFC Ltd, DHFL, etc. Hence they are not required to sanction loans on the basis of MCLR. NBFCs grant a loan on the basis of RPLR. They sanction a loan at a discount (Spread) to the RPLR as declared by the NBFC.
Let us take an example, HDFC Ltd may have RPLR of 16.15% and it is giving Home loans at an Interest rate which is discounted to (7.45% to 6.95%). This effectively means it is providing Home loan at 16.15% – 7.45% = 8.7% to 16.15% – 6.95% = 9.20%.
While Interest rates go downwards, HFCs may or may not decrease the RPLR / BPLR. They may go for increasing the spread (discount) on RPLR. This means rates come down for new customers only.
Hence new customers get loans at lower interest rates as compared to old customers. In general HFCs like HDFC gives the provision to old customers to convert to lower interest rates by increasing the spread (discount) for a fee.
Banks provide loan at MCLR/Base Rate–
Banks used to disburse home loans at a mark up to Base Rate till Mar’16. This Base rate used to be the minimum at which Bank can provide the Home loan to its customers as mandated by RBI. The Banks can charge a mark-up which remains constant for the customer till the loan closure.
For example, an XYZ Bank had a Base rate at 9.15%. It gives home loans to customers at a mark up of 0.2% above base rate. It effectively means Customers would get the Home Loan at 9.15% + 0.2% = 9.35 %.
When Interest rates go down, Banks would drop the Base rate ensuring both old and new customers would also get the benefits. The key used to be to take a loan at a minimum mark up as possible.
Since Apr’16, RBI mandated Banks to provide new loans at MCLR – Marginal Cost of Lending Rate instead of Base rate. This is for faster transmission of falling interest. Old Customers can also ask Bank to convert their Home Loans to MCLR for some fees.
MCLR is set based on different tenures. And Home Loans under MCLR is also provided at a Mark Up to MCLR which remains constant for the Loan duration.
For example, let us say Axis Bank MCLR is set at 8.15 % which is for 6 months reset frequency. And mark up is 0.5 % which means it is effectively providing Home Loans at 8.15% + 0.5% = 8.65%. As reset frequency is 6 months, once a customer has taken the loan, the interest rates will not come down till the next 6 months.
Even though Axis Bank may revise MCLR any month if interest rates go down. Like Base Rate, it is ideal for Customers to avail Home loan at a minimum mark up to MCLR.
How Banks like SBI do the lending now? MCLR Rate
Banks have to set the 5 benchmarking MCLR rates for the different time duration (tenure) ranging from one day to one year. Loans are provided after adding a spread based on the MCLR.
This would be based on business strategy and the risk profile of the customer. Home Loans are generally provided on the basis of six months or one-year MCLR lending rates. This is because they are sanctioned for the long term.
Markup on MCLR
Home loans granted by commercial Banks like ICICI Bank, Axis Bank, SBI, etc are sanctioned with some Mark up (also known as spread) on top of the MCLR. So let’s say if the SBI rate for Home loan tenure is 8.5 %, it may sanction a loan at One-year MCLR (8.50 %) + 0.20 % (mark up) to the customer.
Markup is judged on a case to case basis. It is based on the profile of the customer and property on which loan is sanctioned. It varies on the basis of how RBI changes the Repo rate and cost of marginal funds to the Bank.
Why MCLR was required?
It was introduced by RBI to pass the benefits of reduced rates to consumers quickly. Thus while the Base rate was based on the cost of funds, MCLR was linked to the Marginal cost of funds which is directly linked to the RBI Repo rate and Tenor. This would now mean any changes by the RBI in repo rates would be swiftly passed upon to the consumers based on the Tenor.
How is MCLR calculated?
MCLR is calculated based on the below factors. They change as any of the below factors change for the bank. Banks need to assess and publish these rates every month.
Marginal Cost of Funds
This is in layman terms is the cost incurred by the bank for arranging the funds. And banks arrange the funds from below means.
- Customer who deposits the funds in the bank and Bank gives interest to them.
- The interest is given to RBI for taking a loan from it (Repo rate).
- Return it makes on the capital invested
Negative carry on account of CRR
CRR means Cash Reserve Ratio. This is the minimum cash deposit Banks have to maintain as reserves with the RBI. For this deposit, there is no interest earned. Only the cost is incurred in arranging the funds by the Bank.
As the name suggests, these are operating expenses to run the Bank.
RBI has asked Banks to provide loans for five different tenures with published MCLR rates. The tenures are
- One Day
- One Month
- Six Month
- One Year
This is because the Bank has to give different interest rates to customers for deposited cash for different tenures like one day (Overnight to One Year).
Exemptions from MCLR:
There are certain categories of loans that can be priced without being linked to MCLR as the benchmark for determining interest rate:
- Advances to banks’ depositors against their own deposits.
- Loans to banks’ own employees including retired employees.
- Advances granted to the Chief Executive Officer / Whole Time Directors.
- Loans linked to a market-determined external benchmark.
- Fixed rate loans granted by banks. However, in the case of hybrid loans, the interest rates are partly fixed and partly floating. Hence interest rate on the floating portion should adhere to the MCLR guidelines.
- Loans covered by Government schemes where interest is charged as per the scheme.
- Working Capital Term Loan (WCTL), Funded Interest Term Loan (FITL), etc. granted as part of the rectification/restructuring package, are exempted from being linked to MCLR as the benchmark for determining the interest rate.