In sequence to the Home loan rates slashed by State Bank of India on January 1, 2017 by 0.9%, the next in the league is HDFC Bank. On January 3rd, 2017 HDFC Bank announced a cut in the interest rate by 0.45% for loans up to Rs. 75 lakh. leading to cheaper corporate and home loans spurting good news for its borrowers.

While the interest rate shall be same as 8.75% for the loan amount exceeding Rs. 75 Lakh, the borrowers of amount less than Rs. 75 lakh will have a relief by 0.05% as they have to pay an interest of 8.7% per annum against 8.75%.  The women applicant will also get a discount of 0.05% in interest rate.

Reduction in interest rates is an implication of fall in MCLR (marginal cost of funds based lending rates) by 0.9% overnight. These rates shall now be 8.1%, effective from 1st of January. For year 2016, MCLR was reduced to 8.5% with a marginal fall by 0.75% over the year. After huge inflow of funds arising out as an impact of demonetization, the lending rates were anticipated to observe a steep fall by 1.48%. Not just Housing, the reduction in lending rates also expected to be followed by corporate and auto loans.

With the drop in MCLR over the couple of years HDFC ensured to pass on its benefits to its customers’ explained by Renu Sud Karnad, MD, HDFC Bank. Based on MCLR, other banks which have reduced their interest rates include Bank of India, Punjab & Sind Bank and Corporation Bank. While the Corporation Bank lowered the MCLR rate by 0.7%, Punjab and Sind Bank brought it down by 0.8%. Corporation Bank also observes a fall in 1 year MCLR rate by 0.7%.

Even fixed deposit rates are expected to observe a steep cut in their lending rates in coming days. During June’2016, Banks have switched to MCLR as their benchmark lending rate. This switch replaced the base rate system for new borrowers ensuring a fair interest rate to banks as well as borrowers. Interest rates are now calculated on the marginal cost of borrowing and return on net worth for banks.

However, due to fall in lending rates the credit off-take may observe a rise leading a burden on the balance sheets of the banks. As MCLR rates are revised every month, it also seeks to address the regulator’s objective of expediting monetary policy transmission together with transparency in lending rates calculations.