Stimulus for borrowers

Say, there is a double-income salaried couple with a household income of Rs 1 lakh a month, seeking a 20-year loan of Rs 50 lakh. If they approach State Bank of India (SBI), they will give two options – repo rate linked loan rate or RLLR. In this, the equated monthly instalment will be Rs 42,000 (8.05 per cent). In the second option, based on marginal cost lending rate or MCLR, they will have to pay Rs 44,000 (8.60 per cent). However, the latter will remain fixed for 12 months. Which option is better? The first one, as a Rs 2,000 per month saving will translate into Rs 4.80 lakh over 20 years.

Also, the RLLR option will help when the Reserve Bank of India (RBI) cuts its repo rate. You begin to wonder why the bank has kept the MCLR option at all. MCLR option is more profitable for the bank, but it has to offer the RLLR option simply because the government, the major shareholder, is asking it to do so.

After all, none other than the Prime Minister has urged banks to pass on the benefits of repo rate cuts to their customers. The finance minister recently said bankers have agreed to do so. And the RBI governor has been repeating the same message for months now. Only the public sector banks (PSBs) seem vulnerable to this pressure with the private sector refusing to take heed. 

Even SBI has carefully restricted the more favourable RLLR option only to its new borrowers.  Even for new borrowers, it is not clear if they will be able to avail of this favourable RLLR option easily. It might be instructive to note how many new borrowers were added under this new rule in August 2019 (SBI introduced the RLLR option in July 2019). 

The inherent belief of the powers-that-be appears to be that a new home loan is the only way to provide a fillip to economic activity. But a new home loan borrower may not necessarily buy a newly-constructed or under-construction home. He will still enjoy all the favourable terms (including PMAY subsidy, if eligible). 

However, if the rate cut is passed on to all existing borrowers as a reduction in monthly EMI (rather than as a reduction in the number of balance instalments), it will leave additional money in the hands of the borrower to spend or save. This will provide a stimulus to private consumption or household savings, and both are needed quite badly today. The amount of stimulus is not exactly small. 

The outstanding home loans from scheduled commercial banks is around Rs 11,87,000 crore, and a reduction in EMI by passing on even 50 basis points could lead to leaving an additional Rs 7,000 crore in the hands of home loan borrowers. If extended to outstanding home loans of housing finance companies and outstanding loans of small businesses, there would be a decent stimulus of Rs 15,000 crore a year for the economy. 

The default option for passing on the benefit should be by way of reducing the EMI and not reducing the number of balance instalments in the loan. Can the regulator (or the government) bite the bullet? 

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The writer is a Sebi-registered investment advisor