Planning to transfer Home, Car Loan balance? Here's why you should wait till April

Are you planning to transfer your home, car loan balance? You should wait till April 1 as, after that date, the interest rates applicable on home and auto loans may change in accordance with the RBI guidelines. It is expected that borrowers will be able to save more on EMIs from April as from the first day of this month a new RBI-proposed floating rate lending regime will come into effect.  All top banks offer loan balance transfer facility. To lure customers, they also promise big savings. For example, SBI claims to offer low-interest rate, no hidden charges, no pre-payment penalty, concessions for women borrowers etc. However, as the lending system is likely to change next month, it is advisable not to transfer loan balance this month. 

Last month, banks had urged the central bank to delay ushering in the new floating rate lending regime. 

What is RBI proposal?

In December last year, the RBI had proposed a big change in the way banks price their loans. The central bank had then said commercial lenders will have to link the interest rate charged by them to external benchmarks, instead of the internal benchmarks. 

Since April 1 2016, car and home loans have been linked to the marginal cost of funds - based regime (MCLR), which is an internal benchmark rate depending on factors such as fixed deposit rates, the source of funds and savings rate etc. As per this practice, the cost of the loan includes MCLR and the spread of the bank's profit margin. The big flaw of the MCLR-based system is that it doesn't have room for immediate transmission of policy rates decided by the RBI. So, even if the central bank cuts the repo rate, the benefits fail to reach the customers immediately. This is likely to change with the adoption of the new process. 

In its statement on Developmental and Regulatory Policies, released along with the fifth bi-monthly monetary policy statement in December 2018, RBI had said, "... it is proposed that all new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans to Micro and Small Enterprises extended by banks from April 1, 2019 shall be benchmarked" to one of the external benchmarks, including: 

- RBI policy repo rate, or
- Government of India 91 days Treasury Bill yield produced by the Financial Benchmarks India Private Ltd (FBIL), or
- Government of India 182 days Treasury Bill yield produced by the FBIL, or
- Any other benchmark market interest rate produced by the FBIL.

The new system is expected to ensure greater standardisation and improve transparency in loan pricing. 

"The spread over the benchmark rate — to be decided wholly at banks’ discretion at the inception of the loan — should remain unchanged through the life of the loan, unless the borrower’s credit assessment undergoes a substantial change and as agreed upon in the loan contract," the RBI had said. 

"Banks are free to offer such external benchmark linked loans to other types of borrowers as well," it added.

"In order to ensure transparency, standardisation, and ease of understanding of loan products by borrowers, a bank must adopt a uniform external benchmark within a loan category; in other words, the adoption of multiple benchmarks by the same bank is not allowed within a loan category," RBI said. 

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Benefits for borrowers:

First, the new system would likely result in better and immediate transmission of the repo rate cuts. 
Secondly, the system would become more transparent as all borrowers would know the fixed interest rate and the spread value decided by the bank. 
Third, it would allow borrowers to compare loans offered by different banks. Banks would not be able to adopt multiple benchmarks within a loan category.