RBI's CRR cut brings relief: Time for borrowers to review home loan terms

The Reserve Bank of India (RBI) on Friday reduced the cash reserve ratio (CRR) by 50 basis points (bps) to 4% from 4.5%, freeing up funds in the banking system. CRR is the percentage of a bank’s deposits that must be kept with the RBI as liquid reserves.  

 

The central bank’s Monetary Policy Committee, however, left the repo rate unchanged at 6.5% in a majority 4-2 decision. This marks the eleventh consecutive policy meeting over the past 22 months without a change in the repo rate, which serves as a benchmark for lending rates.

 

In such a scenario, should home buyers review their home loan terms now?

 

“The good news is that the banking sector’s liquidity situation is improving,” Animesh Hardia, Senior Vice President of Quantitative Research at 1 Finance, said.  

 

Adhil Shetty, CEO of Bankbazaar.com, said that the CRR cut would allow banks to lend more by freeing up reserves. “This greater availability of credit can lead to lower interest rates as banks compete for borrowers. For home loan borrowers, it’s an opportunity to review loan terms as the market becomes more borrower-friendly,” he said.  

 

Floating-rate borrowers may benefit directly from the CRR reduction. “As liquidity improves, banks might reduce lending rates, which would bring down EMIs for those on floating rates,” said Shetty. “For new borrowers, the lending environment could become more attractive if banks pass on these benefits.”  

 

Fixed-rate borrowers, however, might not see immediate changes. Hardia advised them to consider switching to floating-rate options to take advantage of potential rate reductions.  

 

What borrowers should do?  

 

Hardia suggests a proactive approach:  

 

Review existing loans: Borrowers with floating rates should monitor for reductions in their EMIs or tenure.  

Switch to floating rates: Those on fixed rates might benefit by switching, especially if a rate cut is expected.  

Negotiate with lenders: Customers with strong repayment histories should approach their banks for better terms, similar to those offered to new borrowers.  Consider refinancing: Shifting loans to another bank offering lower rates could result in significant savings.  

 

Shetty provided an example of how borrowers can benefit. Amit, a borrower with a Rs 50 lakh home loan at 8.5% interest for 20 years, could save significantly by refinancing. If his interest rate drops to 8%, his EMI would reduce from Rs 43,391 to approximately Rs 41,822, saving him Rs 1,569 per month or Rs 18,828 annually.  

 

Additionally, prepaying part of the principal, such as Rs 5 lakh, could further lower Amit’s interest burden and reduce the loan tenure.  

 

"Remember, even a small reduction in interest rate can lead to substantial savings over the loan’s tenure. Reviewing loan terms now positions borrowers to benefit from the expected downward trend in interest rates,” said Hardia.

 

If you plan to review your home loan terms or apply for a new one, it's essential to know which banks offer the most competitive rates.

 

Take a look at 20 banks/financial institutes that offer the lowest interest rates for amounts above Rs 30 lakh and up to Rs 75 lakh, based on data from Paisabazaar.com:

 

1. Union Bank of India: 8.35% - 10.90%

2. Bank of India: 8.35% - 10.85%

3. Bank of Maharashtra: 8.35% - 11.15%

4. Punjab National Bank: 8.40% - 10.15%

5. Indian Bank: 8.40% - 10.30%

6. Indian Overseas Bank: 8.40% - 10.60%

7. Bank of Baroda: 8.40% - 10.65%

8. Canara Bank: 8.45% - 11.25%

9. UCO Bank: 8.45% - 10.30%

10. Bajaj Housing Finance: 8.50% onwards

11. State Bank of India: 8.50% - 9.85%

12. Punjab and Sind Bank: 8.50% - 10%

13. HSBC Bank: 8.50% onwards

14. City Union Bank: 8.50% - 10%

15. LIC Housing Finance: 8.50% - 10.55%

16. PNB Housing Finance: 8.50% - 14.50%

17. Godrej Housing Finance: 8.55% onwards

18. Tamilnad Mercantile Bank: 8.60% - 9.95%

19. Aditya Birla Capital: 8.60% onwards

20. South Indian Bank: 8.70% - 11.70%