5 Reasons Why Loans Will Get Cheaper Despite RBI's Status Quo

While RBI Governor Das and his 5 other MPC members committee unanimously voted for a status quo in its last MPC meet for FY20 to curb the higher levels of inflation that for December month breached RBI's comfort level of +/-4% to scale over 7% and kept key repo rates unchanged at 5.15%, interest rates on loans are likely to go down.

5 Reasons Why Loans Will Get Cheaper Despite RBI's Status Quo

Here are given the reasons, why your loans could get cheaper henceforth:

1. Banks given a CRR break on lending to some of the sectors: As per the latest policy statement, banks will be incentivized for increasing their lending to some of the sectors, wherein fresh loans to MSME, home loans and vehicle loans shall be exempted from CRR or cash reserve ratio calculation. The move will loosen up some of the reserves of the bank (reduce cost of funds for them) for lending and reviving demand across these sectors.

2. Banks to be provided with Rs. 1 trillion 1-year and 3-year funds at 5.15%: This way banks will be provided with funds at a cheaper rate. On the move, "We believe the RBI has managed to deliver implicit easing without actually cutting the policy rate", Sonal Varma, economist at Nomura, is quoted as saying in a leading business daily.

3. MSMEs to be given new floating rate loans pegged to external benchmark: Similar to other loan products, the RBI has suggested banks to link MSME loans to an external benchmark that shall effectively lower interest rate for MSME loans. The move has been taken to push economic growth amid GDP falling to a decade's low.

4. Forbearance on asset classification on banks' MSME portfolios has got an extension until December 2020: This would thus free up capital with the lenders.

5. RBI permits DCCO extension for stressed commercial real estate projects: The RBI has decided to permit extension of date of commencement of commercial operations (DCCO) of project loans for commercial real estate by a year's time, delayed for reasons beyond the control of promoters. So, if the delay is for genuine reasons, there shall be no downgrade of commercial realty loans.

So, all in all as cost of funds decreases for lenders through these measures, it is highly likely that the same shall be passed on to borrowers. The expected cut in interest rate on loans has come through just a day after RBI's sixth bi-monthly MPC statement with SBI cutting lending rate (MCLR) across tenures by 5 basis points. 1 basis point is one-hundredth of a percentage point. This is the ninth cut in MCLR by the bank for the financial year 2019-20.

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