GOOD NEWS! Home, car loan EMIs to go down

Bankers believe the second rate cut outside the policy side will spur a relook at their base rates

Home and car loan borrowers are most likely going to be a happier lot in 2015.

With the Reserve Bank of India cutting the repo rate twice -- from 8 to 7.5 per cent -- in two tranches since January, banks would sooner or later start transmitting the cut.

“The second 25-basis point repo rate cut in this quarter, outside the policy cycle, signals the resolve of RBI to pro-actively play its role in propelling growth. . . since there is a lag effect for the monetary transmission to take place, effect of previous 25-bp cut together with the present rate cut would accentuate banks to review their base rates,” said T M Bhasin, chairman of Indian Banks' Association and chairman and managing director of Indian Bank.

A number of bankers and economists believe, RBI might further cut rates by 50-75 basis points during 2015, including one during RBI's scheduled policy review meeting on April 7.

Any rate cut will lead to good savings for the borrower.

If someone had taken a 20-year home loan of Rs 50 lakh (Rs 5 million) a year back, at an annual interest rate of 11 per cent, the current equated monthly instalment works out to Rs 51,609.

If banks reduce the rate by 50 basis points, the EMI would come down to Rs 49,967 from the 13th month -- a saving of Rs 1,642 per month or Rs 19,704 annually.

For a new borrower, the EMI would start at Rs 49,919 — a saving of Rs 1,690.

However, for those who want to keep the EMI constant, a 50-basis point drop will reduce the tenure by two years.

Similarly, if one has taken a four-year floating rate car loan of Rs 5 lakh at 11.5 per cent recently, the current EMI works out to be Rs 13,045.

If lenders reduce the rate by 50 basis points, the new EMI will be Rs 12,923.

Lenders have been under pressure for some time due to the lack of transmission even after the central bank cut rates earlier.

The rate cuts have been used to expand their margins and improve balance sheets.

Following this, the banking regulator revised norms for calculation of the base rate (the benchmark to which all the floating rate loans are linked) to ensure that banks pass on the drop in cost of funds to borrowers fairly.

Budget 2015: Complete Coverage