Consumer loans become cheaper as banks adopt new rate formula

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

Consumer loans on Friday became cheaper with banks moving to a new way of setting lending rates following Reserve Bank of India’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 on Friday joined their peers like State Bank of India, 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 had, on Thursday, 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 per cent in some cases.

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

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

The MCLR is expected to address 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.

Illustration: Uttam Ghosh/Rediff.com