RBI Mandates Quick Transmission of Rate Cuts to Home Loan Customers: Dr. Niranjan Hiranandani - National President NAREDCO
Home loan customers’ grouse that banks were slow in passing on the benefit of rate cuts by the Reserve Bank of India (RBI) will be history, with the RBI making it mandatory to link home loan interest rates of all new floating rate loans to an external benchmark. Effectively, the transmission of rate cuts by the RBI to a home loan customer will happen faster, and in full measure.
The advantage will not be restricted to the advantage of lower interest rates, but will also positively impact sentiment. Fence-sitters will have an additional reason to make their ‘buy’ decision, as this will ensure lower EMIs in sync with RBI’s rate cuts.
Across 2019, RBI has reduced the repo rate by 110 basis points, while media reports said banks passed on only an average of 40 bps to borrowers.
The move is significant, given the urgency to reduce borrowing costs which would in turn, push consumer demand. This is viewed as one of the options to kick-start spending, to combat the economic slowdown.
The RBI Circular described as ‘not satisfactory’ the transmission of policy rate changes to the lending rate of banks under the current marginal cost of funds based lending rate (MCLR) framework.
This resulted in the decision making it mandatory for banks to link all new floating rate personal or retail loans and floating rate loans to MSMEs (micro, small and medium enterprises) to an external benchmark effective October 1, 2019.