The Reserve Bank of India's (RBI's) surprise 25 basis point (bps) repo rate cut is likely to bring some cheer to borrowers of home and car loans. Adhil Shetty, CEO of Bankbazaar.com, says: "The rate cut is most welcome. But we need to wait and see how much of the 25 bps cut is transmitted to retail borrowers." That is, it is over to banks now to transmit the rate cut to, not just new borrowers, but also existing borrowers.
If the entire rate cut is passed on by banks, there would be some relief to borrowers. For example, if a 20-year home loan of Rs 75 lakh was taken by a borrower at an annual interest rate of 8.8 per cent, the equated monthly installment (EMI) would have been Rs 67,238. After the rate cut, if the interest is 8.55 per cent, the new EMI would be Rs 66,039 -- a drop of Rs 1,199. Over the entire tenure of 20 years, the savings on interest outgo would be Rs 287,760.
In case of a seven-year car loan, the impact is even lower. For a loan of Rs 10 lakh, the difference in EMI between a loan taken at 9.25 per cent and 9 per cent is merely Rs 127 (see table). However, a point to note is that banks seldom pass on the entire rate cut. So, a 10-15 basis point rate cut will not have a major impact on borrowers.
In fact, Gaurav Gupta, founder and CEO, Myloancare.in, feels that there won't be any immediate impact on rates, and things will change only from April. "Banks would find it difficult to pass it any time soon, as they are grappling with low liquidity in the banking system, post the non-banking finance company (NBFC) liquidity crisis in November." He feels that transmission is more likely to happen in March-end, which will be effective from April 1. "There is a possibility that public sector banks may face pressure to reduce rates as elections are around the corner. In such a situation, banks will find ways to work around it. They can, for example, withdraw discounts to card rates and other schemes they are offering now," he adds.
Also, given that many existing borrowers are under the marginal cost of lending rate or MCLR regime, the transmission may happen at a later date. Naveen Kukreja, CEO & co-founder, Paisabazaar.com, says: "As and when banks transmit policy rate reduction through MCLR rate cut, the cost of borrowing for fresh home loan borrowers will come down. However, existing borrowers will continue to pay at the same rate of interest until their next interest reset date. The MCLR applicable on their reset date will remain in force till the next reset date."
If your bank does not cut rates while other banks do, should you shift? "Compare your home loan rate against the best rates available in the market. If a difference of 25-50 bps has developed, and you have a good number of years left in your tenure, you are likely to benefit from shifting," says Aditya Mishra, founder and chief executive officer, SwitchMe, a digital home loan broker.