With the ongoing pandemic crisis worsening over the past month and the resultant lockdown impeding economic activities, the RBI came out with its third set of measures last week to bring relief to borrowers — businesses and individuals.
We look at each measure to understand what it means for borrowers and savers.
Lending rates to fall again
After the sharp 75-basis point cut on March 27, the RBI reduced its policy repo rate further by 40 bps to 4 per cent. Banks had introduced repo-linked loans from October last year. Borrowers whose loans are linked to repo will see lending rates fall in the immediate future (the RBI has mandated that loans be reset at least once in three months). This means a notable reduction in your EMIs.
In March alone, the average lending rates (for all banks put together) on fresh loans fell by 43 basis points due to the substantial reduction in lending rates of repo-linked loans.
For old borrowers (pre-MCLR regime or pre-repo-linked loans), the fall in lending rates may not be uniform across banks, as it would depend on each bank’s cost of funds. Hence, the change in MCLR (marginal cost of funds-based lending rate) will vary across banks. F
or instance, one-year MCLR has fallen by 15 basis points to as much as 45 bps in some banks over March and April.
For new borrowers looking to take loans, it is true that lending rates are very cheap currently. But additional loans should be taken on a need basis and not driven by rates alone.
Given the uncertainty around jobs, borrowers should not over-leverage themselves.
Depositors’ tale of woes
In a falling-rate scenario, depositors often get the short end of the stick. The RBI cutting repo rate, in turn, nudges banks to lower their deposit rates.
In the current scenario, on the back of excess funds with banks (owing to their risk aversion to lending), deposit-rate reduction can be quick and sharp.
In 2019, fixed deposit rates had fallen by 75-100 bps across banks and tenures of deposits. Since March this year, fixed-deposit rates have fallen by further 75-100 basis points (even higher than 1 per percentage point in many banks for specific tenures). What’s more, banks may also look to cut savings rates which can add to depositors’ woes. SBI had cut its savings deposit rate to 2.75 per cent last month (deposits up to₹1 lakh). While other leading banks still provide 3.25 per cent on low-value savings deposits, this may change going ahead.
The only silver lining is that the liquidity situation varies across banks. After the YES Bank crisis, a few private banks saw outflow in deposits and, hence, reduction in deposit rates may not be that sharp in these banks.
Again, some other leading private banks continue to witness healthy loan growth and require funds to deploy for lending. These banks may also cut deposit rates in a measured manner.
As such, deposit rates in private banks are much higher than in public sector banks. Even some small finance banks offer very attractive rates on certain deposits. Hence, you as a depositor may still have some good options to choose from.
Moratorium extended
In a bid to ease the pain of borrowers, the RBI had provided a three-month moratorium on payment of instalments on terms loans (home loan, vehicle loan, credit card dues, personal loans, etc) falling due between March 1 and May 31.
This has now been extended by another three months, from June 1 to August 31.
While the extension may offer immediate relief on your loan payments, remember that this is just a temporary postponement of payment until August 31 and not a waiver of loan repayments.
Hence, the bank will continue to charge interest on the outstanding loan amount at the rate applicable for the respective loan during the six-month moratorium period. This interest will be added to the principal amount and will lead to an increase in the tenure of the loan. The six-month moratorium (as against three-month earlier) can lead to a sharp extension of the loan, which can cost you dearly. In the case of credit card dues, the moratorium can pinch borrowers even more given the steep interest rates on dues (up to 40 per cent a year).
Hence, opt for the moratorium only if you are cash-crunched.
Also, if you have already taken the moratorium but do not want to continue, approach your bank to understand the operational nuances.