How to manage your MCLR ?

It may be noted that many of the banks like Kotak Bank, Axis Bank, Indusind Bank, YES Bank and others have raised their MCLR by 5-10 basis points. Further, PSU Banks are expected to follow the suit soon. It is still not clear as to whether this is a temporary phenomenon or will be a continuous process is still to be seen.

1. The interest rate in the economy has gone up, as is evident from the yield produced by ten year Government Securities which has moved up from 6.41 per cent during July 2017 to 7.40 per cent in December 2017 and at present stands at 7.25 percent.
2. Many banks parked their funds in excess of their SLR requirement, in the G-Securities and the bonds have now taken a hit. In order to maintain their margin, they have opted to increase their MCLR.
3. Also, the banks’ cost of funds has gone high. Many banks have increased their Fixed Deposit and Certificate of Deposit rates, which in turn has pushed their cost of funds.  Since cost of funds has an impact on the MCLR, the result is an increase in the MCLR.
4. One more factor is that there is no increase in deposits, and this has resulted in banks paying more for getting funds for the period for which they require funds.
5. Now, the interesting thing is to note as to whether an individual’s loan is bench marked against base rate or MCLR.

What is suggested now?

• Do you have excess funds available due to variable salary portion or a bonus received? Make it a point to make a part prepayment on the loan.
• One more option is if a borrower has funds but wants to utilize the same for some urgent needs, it is advised to shift to smart home loans that is available with an overdraft facility. Here one can put their funds in the account and bring down the Principal, and also retain the flexibility to withdraw the money whenever required.
• It is advisable hence, that a borrower should check with their banks, as to whether they are offered the best rate available in the market. They should act smart to shift to another lender who could offer the best rate.

Conclusion:

• A continuous increase in MCLR could result in a considerable impact. Obviously banks have a tendency to raise their loan tenor, during increase interest rates, and would not go for changing the EMI.
• This means, that the borrower’s outflow of interest will increase. If possible, it would be better to increase the EMI, instead of the Loan Tenure, if one could convince their bankers.