MCLR has a competitor, RLLR. Both has different rate of interest, benefits and risks too. Have a look on each prospect.

RBI’S RLLR or Bank’s MCLR !

Even today, the most favorite investment is to take home. But for home, you need a loan and then it comes in the mind of home buyers that who will provide a cheaper loan! RBI issued circular to all banks to provide loans linked to repo rate to borrowers’ i.e; Repo Linked Lending Rate or RLLR from October 2019 and banks are now rolling out loan one by one.

Along with this, banks also have their own MCLR – Marginal Cost of Lending Rate at which banks provide retail loans. So the question arises that which will be better, what should a customers choose and who will bring more difference in the EMI? Let’s understand this step by step –

Benchmarking effect
After the RBI order, banks are now giving loans with RLLR (Repo Linked Lending Rate) and this facility is also offered to banks to their old customers. This is an external benchmarking in which RBI’s role is bigger because the interest rate is now linked to repo rate. Any change in the repo rate will also make a direct difference in the interest rate.

Repo Linked Lending Rate – RLLR

Apart from this, RBI also gave banks another option in which they can decide the lending rate themselves but they should be linked to the repo rate. Now this made its impact on MCLR – Marginal Cost of Lending Rate which is the internal benchmarking of banks.

Banks fix loan rates according to their capacity and offer loans. Banks control and vary it by themselves. The change in the repo rate does not much affect the MCLR. It depends on the bank’s own financial condition.

In such a situation, taking home loan according to RLLR would be more beneficial.

“RBI wanted to extend the benefit of repo rate cut to common loan borerowers. The real estate sector also urged many times to reduce the interest rate, but even after that the banks only cut the interest rate only marginally. After this, RBI took such a step which is commendable”, says Suresh Garg- CMD, Nirala World

Marking or margin
At the time of granting a loan, a bank decides a marking or margin on the basis of which the interest rate is fixed and the monthly EMI or installment of the loan is made. If the repo rate is 5.15%, the bank imposes its marking on it and then gives the loan to the customers according to RLLR or MCLR.

In the case of RLLR, a bank can only take a fixed margin as it is being determined by the RBI. SBI is also giving loans to customers by keeping a margin of 40-110 basis points. If a bank keeps its RLLR at 7%, then the loan rate can be up to 7.40-8.10%.

Now, if the repo rate of RBI falls by 25 basis points, the home loan rate will come down to 7.15%, while the rate of home loan will also increase when the repo rate increases! However, it is just starting and the picture will be clearer in the coming days when there will be a change in the repo rate.

Now MCLR would follow the same model. The loan is given only after keeping margins of 50-100 basis points. But the base rate of MCLR would be above the repo rate as it would have been set by the bank.

Banks have also cut MCLR to maintain their customer base, yet MCLR may be more than RLLR.

Hariom Dixit- Director, Gayatri Group says, “RBI has given home buyers a better option. Now not only MCLR, loan can also be availed at RLLR rate. This is unique in itself which has never happened before. The bank used to run its own benchmarking while giving loans, but now it will also directly interfere with the RBI, which will take care of the pockets of the borrowers anywhere.”

Pattern of EMI – Both MCLR and RLLR have the same objective of loan recovery from customers. But there is a big difference.

In case of RLLR, there will be no change in the principal amount and it will remain the same for the entire term. In this, the customer has to pay a principal or principal of at least 3% per annum. The effect of any change in the repo rate will be automatic on the EMI.

Now come on MCLR, the bank charges interest more in the initial years and the principal in the last few years. Meaning here the customer has to pay interest first and then the principal. At present, banks offer the facility of re-structuring only once in the entire loan tenure, on their own terms.

Hence in RLLR, there is more transparency than MCLR.

Dinesh Jain- MD, Exotica Housing says, “Reducing interest rates was very important to boost the housing sector. Even after deducting 135 basis points, the home loan interest rate was high, which was not a good thing for home buyers. The MCLR is also going to change with the repo linked lending rate, home buyers will also get the option and there will be transparency in the repayment.”

Determination of EMI – In case of RLLR, the EMI depends directly on the repo rate. Any reduction in the repo rate of the RBI will change the EMI of the customer from the 1st of the new month.

Whereas in case of MCLR, the difference in repo rate does not affect the EMI immediately! RBI would take a decision on repo rate 6 times in a year but there is no such pressure on banks. Between January and December 2019, the RBI had reduced the repo rate by 135 basis points but there was no such difference in the interest rate of the banks.

For a middle class home buyer, the reduction in installment is not less than any relief because the home loan is not for 2-4 months but for 15-20 years.

Interest Rate – If you look at the interest rate of SBI, the country’s largest customer base bank, SBI’s RLLR is 7.65% and MCLR is 8.20%. Obviously, the rest of the banks will be higher than this.

Now in this situation too, it is better to take a loan according to RLLR and new customers should take a loan linked to the repo rate.

But the bank has to take care of both its new and old customers. Now what should the old customers do in such a situation? According to market experts, the old customers should have a little weight because:

  • Only a few selected banks have started offering repo rate linked loans. Competition will come in the market when some more banks come in and it will be easy to compete in the rate.
  • Banks can also charge a fee for switching rates. SBI is also taking 0.25% of the principal amount, which is not small at all.
  • Those whose loans are between 30 – 50 lakhs can get the benefit of the repo rate loan, although the MCLR can be of benefit only on a large loan amount.

Loan linked to repo rate linked repo rate will likely have lower interest rate as it will directly depend on the repo rate and not on the bank’s own marking. Many more such steps are necessary for Housing for All, added Mr. Garg.

In such a situation, it will be necessary that the customers to switch the loan only after examining it completely or taking a new loan, lest any big risk in the circle of cheap loan gets hugged by you.