HOUSING FINANCE COMPANIES vs BANKS

HOUSING FINANCE COMPANIES vs BANKS

Subject : Economy

Context : Even as Housing Finance Companies (HFCs) have come under the direct supervision of the Reserve Bank of India (RBI) since August 2019, existing home loan customers are getting differential treatment from banks and HFCs.

Concept :

• Over the last 18 months to 5 years, if bank customers have seen better transmission of rate cuts in their home loan rates on account of cut in marginal cost of lending rate (MCLR), HFC customers have had limited benefit because of relatively smaller cuts in the prime lending rate (PLR).
• While HFCs and banks compete hard on rates to attract new customers, the cut in rates for existing customers depends on the reduction in MCLR by banks and in PLR by HFCs in response to a repo cut by RBI.
• HFCs base their lending rates on PLR and offer a discount on it to customers. While the discount is fixed for the term of the loan, an upward or downward revision in PLR (in line with repo rate movement) impacts the lending rate of the existing customer.
• As for new customers, the HFC can increase the discount on the PLR to offer a more attractive rate. A cut in PLR is reflected in the effective rate for the customer within three months.
• In the case of banks, lending rates are based on either MCLR or on the repo rate (since October 2019).

Marginal Cost of Lending Rate

• It is a benchmark lending rate for floating-rate loans which came into effect in 2016.
• This is the minimum interest rate at which commercial banks can lend.
• This rate is based on four components—the marginal cost of funds, negative carry on account of cash reserve ratio, operating costs and tenor premium.
• MCLR is linked to the actual deposit rates. Hence, when deposit rates rise, it indicates the banks are likely to hike MCLR and lending rates are set to go up.
• The transmission of policy rate changes to the lending rate of banks under the current MCLR framework has not been satisfactory.

Prime Lending Rate

• A prime rate or prime lending rate is an interest rate used by banks, usually the interest rate at which banks lend to customers with good credit.
• Some variable interest rates may be expressed as a percentage above or below prime rate