Indian home loan market has two types of players
1. Banks
2. Housing Finance Companies (HFC’s)
| Banks | Housing Finance Companies ( HFC's) | |
|---|---|---|
| Regulator | Reserve Bank of India | National Housing Bank |
| Interest Rate Benchmark | MCLR - The Marginal Cost of funds based Lending Rate wef 1st April 2016. Prior to this the benchmark was Base Rate | PLR - Prime Lending Rate |
| Lending Model | MCLR plus a Margin, margin being constant & MCLR being the variable | PLR minus a Discount, discount being constant & PLR being the variable |
As per RBI guidelines for banks, all floating rate rupee loans sanctioned and credit limits renewed w.e.f April 1, 2016 are priced with reference to the Marginal Cost of Funds based Lending Rate (MCLR).
Every Bank reviews and publishes the Internal benchmark MCLRs on a monthly basis & is displayed on their website
| Tenor | MCLR |
|---|---|
| Overnight | ---% |
| 1 month | ---% |
| 3 month | ---% |
| 6 month | ---% |
| 1 year | ---% |
| 2 year | ---% |
| 3 year | ---% |
Your home loan rate with any bank will be referenced to their MCLR across one of the above tenor by way of a margin/spread
Similarly, the PLR of your HFC will be displayed on their website and your home loan rate with them will be linked to their PLR by way of a discount/spread
1) Lending model of Banks
Lending Rate = MCLR + Margin
2) Lending model of Housing Finance Companies
Lending Rate = PLR - Discount
RBI’s policy(Repo) action in the last four years
RBI reduced the repo rates by 2 full percentage points in the last 4 years
What was the corresponding reaction of your preferred bank w.r.t their interest rate benchmark MCLR/base rate?
What was the corresponding reaction of your preferred HFC w.r.t their interest rate benchmark PLR?
Inbuilt Safety Net
As per RBI rules banks cannot lend below their benchmark MCLR.
Lets take an example of Bank 'A'
| Tenor of referenced MCLR | 6 month |
| 6 month MCLR of this Bank | 8 %( variable) |
| Margin Over the MCLR | 0.15% (constant) |
| Your ROI | 8.15% |
At any given point in future this bank cannot lend below 8%. If the market rate falls below 8% they have to reduce the 6 month MCLR to below 8% because of the RBI rule
If that happens your rates will also fall as your margin is constant. If new 6 month MCLR of this bank comes down to 7.9% your rate will become 8.05%. Refer Comparison Tool for more clarity