Customers can also negotiate with their respective banks to ask for a waiver of the charges as banks would fear losing their clients
Customers are now getting a waiver on their charges on transfer of housing, auto and personal loans to marginal cost based lending rate (MCLR) and to banks with lower rates as competition among banks gathers pace.
Amid rising non-performing assets in the large corporate segments, banks are getting aggressive on growing their retail lending portfolio, especially home and personal loans.
Lenders including State Bank of India (SBI) and HDFC, one of the largest mortgage financers, are asking customers to transfer their base rate-linked loans to MCLR to benefit into lower EMIs (equated monthly instalments).
However, switching from base rate to MCLR or transfer from one bank to the other is a cost incurred by the bank and usually this is passed on to the loan borrower in the form of processing fees, legal charges and others.
A Bank of India general manager told Moneycontrol, "Competition is increasing and we have to go by the market demands. Though we lose on the margins and some other income, we have to keep our customers. If other banks offer lower than us, we have to stop our customers from leaving us, as well as protect our margins and maintain certain retail share."
Similarly, N.S. Venkatesh, Executive Director, Lakshmi Vilas Bank, said, "Most banks have a huge chunk on base rate. So, the movement to MCLR will have to happen for customers to get lower rates. With RBI also reviewing the base rate to be tweaked to ensure lower rates are transmitted, we too are looking at waivers if and whenever there is a requirement. It is always a relationship-based pricing based on the loyalty, repayment track record and their credit scores."
Customers can also negotiate with their respective banks to ask for a waiver of the charges as banks would fear losing their clients.
Typically, processing fee can be anywhere between 0.5-1 percent of the transferred amount. In addition to 0.20-0.50 percent stamp duty charge. But the switching of a floating rate home loan can be done with zero foreclosure charges.
The switch-over cost typically can be around Rs 5,000-20,000 across banks. So, as a borrower servicing the loan under base rate regime, you can inquire with your lender about the cost of switch in numbers. Then comes the important aspect of switch, and i.e. the state of EMI and interest cost on loan transfer to MCLR.
Banks usually hire channel agents or intermediaries to facilitate transfer of loans while switch from base rate to MCLR is typically avoided by banks as they earn higher interest on base rate.
Sukanya Kumar, Founder and Director, RetailLending.com, said, “If you are switching banks, almost all banks are waiving the charges today as they can get a loyal customer and also cross-sell more products to the same customers.
“While some banks are still stricter in terms of self-employed customers but a salaried borrower can negotiate well. Borrowers with higher loan amounts, tied up with well rated builders in case of home loans are usually the beneficiaries. If not intermediaries like us help in absorbing the costs and we get our share from banks,” she said.
A channel agent told Moneycontrol that they can help customers waive off foreclosure charges in case of loan transfer in personal loans above Rs 10 lakh. On home loans, still there are very few banks waiving charges.
Base rate vs MCLR
With the easing interest rate cycle and the introduction of the MCLR mechanism to reduce interest rates with a formulae-based calculation, home loans have grabbed the pie of retail loans.
Banks have reduced MCLR by about 92 basis points (bps) since its inception in April 2016. During the same period, average base rate on fresh loans has been cut by 75 bps, while on outstanding loans, it is even lower at 57 bps.
One bp is a hundredth of a percentage point.
Prior to April 2016, base rate was the minimum lending rate for loans.
The Reserve Bank of India (RBI) has also been nudging banks to pass on the lower interest rates to customers.
In the August monetary policy conference, RBI Governor Urjit Patel said, "Given the liquidity conditions prevailing and that we have reduced policy rates by substantial amounts since the easing cycle started, there is scope for banks to reduce lending for those segments that so far have not yet benefited to the full extent of our policy rate cuts."Led by SBI, effective lending rates charged by most banks on retail loans are at 8.35-8.50 percent.