With reasonably-priced apartments, land-pooling and public and private housing and loan incentive schemes, the Home Loan Market is growing rapidly in our country. Home Loans interest rates this year are at their lowest of the last six years. The Loan Interest Rate which is the cost of borrowing money (to be repaid by the borrower to the lender) is decided by lenders after considering several factors. Let’s go through them below for a comprehensive understanding of the subject:
Repo Rate: Repo rate (RR) is a method used by the Reserve Bank of India to control inflation. It is the rate at which the Reserve Bank of India lends money to banks if the banks have a deficit. When the RBI changes the Repo Rate, interest rates on all banking products including home loans are affected.
MCLR: To understand MCLR we should first know about the Base Rate (BR). Base Rate is the minimum interest rate, set by the Reserve Bank of India (RBI), on which a bank/lender can lend. For loan applicants, banks can’t set interest rates lower than the RBI’s Base Rate. In April, 2016, the Reserve Bank of India introduced Marginal Cost Fund Based Lending Rate (MCLR). Through the MCLR concept, a set of five benchmark lending rates for different time periods of the year (overnight, one-month, three-month, six-month, and one-year) are decided and finalized as per the rules of the RBI. Now Base Rates are determined through MCLR calculation which in turn depends on factors such as marginal cost of funds, negative carry on account of CRR (Cash Reserve Ratio), tenure premium and the operating cost. Loans these days are MCLR-linked which means if the RBI changes their Repo Rate, banks are obliged to change their MCLR and thus the home loan interest rates on existing and upcoming loans shall be changed as per the rules.
Reverse Repo Rate: Just like the Repo Rate, Reverse Repo Rate (RRR) is a method used by the RBI to regulate the money in the country’s economy. It is quite simply the rate at which the RBI borrows money from banks. A rise in the Reverse Repo Rate can lead to a fall in the country’s money supply while a fall in the Reverse Repo Rate can lead to the opposite. A change in the RRR has a direct influence on the bank lending rates and hence on the home loan interest rates.
Cash Reserve Ratio:Cash Reserve Ratio or CRR is the cash reserve which a bank keeps with the RBI. It is a fraction of the total deposits of the bank’s customers’ money. CRR is an important financial tool for the economy and thus has a substantial impact on the home loan interest rates. It ensures that the banks don’t spend all of their money on their products and services etc. by maintaining a cash reserve. Hence, CRR decides the amount of money a bank can use for lending and or investment purpose. To be clearer, for example, Rs. 100 is deposited in a bank and if at that time the CRR is 5% then the bank will have to deposit Rs. 5 with the RBI and will only have Rs. 95 for lending to the home loan applicant. Thus CRR affects bank’s cash reserve in turn influencing the lending rate and its interest rate.
Other than the above, Statutory Liquidity Ratio (SLR), the ratio between liquid assets and Net Demand and Time Liabilities (NDTL) also influences banks’ lending rates and hence home loan interest rates. To have a booming real estate market, it is essential to have lower home loan interest rates and so the government along with the RBI tend to stabilize all the above influencing factors so that home loans interest rates stay within a common person’s budget.
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