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Home loans need a more stable benchmark

Household Finance Committee provides suggestions on how participation of households can be enhanced

Home loans


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Have you ever tried shopping for a home loan? Chances are that you would be totally confused. While the basic benchmark, the marginal cost of funds-based lending rate (MCLR) stays the same, most banks use different tenures to calculate the rate. Some, like State Bank of India and Punjab National Bank use one-year MCLR while others like HSBC and Citibank use 3-month as benchmark. And some like ICICI Bank use two benchmarks — 6-month and one year MCLR. Then, there are different offers that give some 10 basis point benefit for women and so on.

Against this backdrop, the Reserve Bank of India (RBI)-appointed Household Finance Committee, headed by Tarun Ramadorai, has produced a report that offers a comprehensive set of suggestions on how the participation of Indian households in formal financial markets can be enhanced. And, one of its main targets is the home loan sector.

Link to repo rate: Since April 1, 2016, the benchmark used for determining the home loan rate has been the marginal cost of funds based lending rate (MCLR). Despite the switch from base rate to the MCLR regime, the home loan rate does not decline rapidly when interest rates within the economy are falling. One reason is that the home loan rate is linked to the MCLR, which is controlled by banks. The committee has suggested that it should be benchmarked to the repo rate, a well-known and widely-publicised rate. Experts disagree on the finer points of this suggestion. Says Manoj Nagpal, chief executive officer (CEO), Outlook Asia Capital, “If you do want to link the home loan rate to a more transparent benchmark, it has to be a market-determined rate, such as the 10-year G-Sec, and not an RBI-determined rate.” He adds that the repo rate and market-based rates sometimes move in opposite directions.

According to Naveen Kukreja, CEO and co-founder,, the suggestion to make banks quote RBI’s repo rate instead of their own MCLR rates will definitely make loan rate comparison easier for borrowers. However, he adds: “This may not help borrowers to avail of reduced rates as the actual rate charged by banks depends on the borrower's profile, income, credit score and various other factors.”

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First Published: Fri, October 23 2020. 19:01 IST