Consumer loans become cheaper as banks adopt new rate formula

Consumer loans Friday became cheaper with banks moving to a new way of setting lending rates following RBI's diktat to ensure faster and effective transmission of its policy rate cuts to borrowers.

A number of banks, including ICICI, Bank of India, IDBI today joined their peers like SBI, HDFC Bank and Axis Bank to make a shift to lending rates based on marginal cost of funds.

Other banks that have adopted new methodology for calculating lending rates include Kotak Mahindra Bank, Yes Bank and Oriental Bank of Commerce.

Banking major SBI, HDFC Bank, Axis Bank, among others yesterday said that they would move to new methodology for setting lending rates from April 1.

RBI had asked banks to price fixed rate loans of up to three years based on marginal cost of funds from April 1.

The lending rate based on marginal cost of funds is lower than base rate in some cases resulting in lower EMIs for borrowers. Most of the banks were deciding lending rates based on their average cost of funds.

Experts have said implementation of Marginal Cost of Funds-based Lending Rate (MCLR) would bring down lending rate by up to 1% in some cases.

ICICI Bank in a statement said that it has fixed lending rate of 9.10%for three-month loan, 9.15% for six months and 9.20%for one year loan. The base rate or the minimum lending rate of ICICI Bank is 9.35%.

Similarly, after implementing MCLR, Kotak Mahindra pegged lending rate at 9.60%for one-year loan and for 3 years at 9.65% Kotak Mahindra Bank has fixed its base rate at 9.50%.

The MCLR is expected to address the RBI's primary objective of expediting monetary policy transmission along with augmenting uniformity and transparency in the calculation methodology of lending rates, ratings agency Ind-Ra has said.