It's possible that banks may stop offering the pure floating rate option at all for car and personal loans, making it very expensive or hiding it to the point of making i tnot available, one expert says.
Interest rates on home loans, car loans and personal loans will fall with the implementation of the new marginal cost based lending rate (MCLR), which has kicked in from April 1. Floating loan products like the car loans and personal loans offered by public sector banks may become fixed rate loans. Private banks already have fixed loans for these products, but they are likely to create hybrids to attract borrowers to higher cost fixed loans.
Harsh Roongta, a leading financial planner said, "Lower tenure loans like car loans and personal loans which are currently being given on floating rate basis by the PSU banks particularly (most private banks are already providing car loans and personal loans on a fixed rate basis primarily) will shift to a fixed-rate regime so that the banks can charge a pre-payment penalty in the event of pre-payment. In fact, it is possible that the banks may stop offering the pure floating rate option at all for such loans or make it very expensive or hide it to the point of making it not available. "Even for home loans we shall see many hybrid loans where the initial period of loan will be fixed rate for at least 3 years – this will again enable the banks to charge a stiff pre-payment penalty in the event that the consumer wants to pre-pay or shift his loan.
Banks have started making changes in their loan products. Bank of Baroda, for example, has relaxed the eligibility criteria and enhanced the quantum of home loans to Rs 10 crore from the existing Rs 3 crore, effective April 1, but the interest rates remain unchanged at 9.65% for their best customers. They also increased the quantum of auto loans to Rs 1 crore from April 1. The bank also hiked the loan to value of auto loans to 95% of the on-road value and in some cases reduced the LTV to 80% on a perceived risk for certain category of customers.
Bank of Baroda official in charge of retail loans said, "The MCLR will keep changing every month, but the home loans will have an MCLR depending on when the loan is disbursed and that rate will be on with a reset clause after a year."
RBI earlier had exempted all fixed loans from the purview of the MCLR, but later came out with a notification saying that only fixed-rate loans up to three years shall be priced with reference to MCLR. Fixed-rate loans of tenor above three years will continue to be exempt. Even though banks will announce new MCLR rates every month or once a quarter, home loans which are linked to MCLR will be reset on a yearly basis.
Bankers and personal finance experts say that they expect to see a number of fixed loan products from banks, specially on car loans and personal loans. While most of the public sector banks have floating rates, in a falling interest rate regime it makes sense to keep rates floating, and in a tightening regime it makes sense for borrowers to fix their interest rates.
Anshula Kant, chief financial officer, State Bank of India, told dna last week, "We will launch many fixed loans products like car loans and personal loans for the retail customers." The bank which was the first to announce its MCLR was also the first to reduce its home loan lending rates by 0.10% effective April 1. Majority of the banks are still to announce their their new reduced home loan rates.
S K V Srinivasan, executive director, IDBI Bank said, "We will wait until the credit policy announcement to decide on our new home loan rates. Our Alco (asset-liability committee, the rate setting committee of a bank) will meet after the policy to announce the new rates. But customers can expect a lot of fixed loan products from banks. Even the existing fixed loan car and personal loans from most banks will be relaunched with added features and revised rates of interest."
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