How much can you save with a 25 bps rate cut

Chennai: Reserve Bank of India has a 50 basis point rate cut will have a varying impact on monthly repayments on home, car and personal loans. For mortgages, the general rule of thumb - EMIs falls by Rs 17 for each RS 1 lakh by a mortgage with 20-year tenure - will apply. In case of car loans, the average monthly fall in EMI RS100 be around for an RS 4-lakh loan spread over 36 months. On personal loans, will the monthly savings on the EMI will be very small at around Rs 50-100 for an RS 3-4 lakh loan spread over 36 months or a total of Rs 1500-3600.Existing home loan borrowers may not even realize reduction because instead of varying EMIs, typically lenders vary the tenure of the loan. Also those who availed themselves of loans in the last three years is probably locked into a teaser rate, where rates are fixed for the first year and jump up after the fixed appointment is over.Friday joined Syndicate Bank, ICICI Bank, Punjab National Bank and IDBI Bank in announcing a 25 basis point cut in base rate. Others, such as Kotak Mahindra Bank and HDFC Bank is yet to take a call. No lender has not yet matched the RBI has a 50 basis point reduction, which means that 50 bps cuts have improved the atmosphere instead of putting any money in your wallet."The liquidity is very tight, as RBI has a 50 bps rate cut will not mean a corresponding reduction in the banks, unless the deposit rates fall," said Sumit Bali, executive vice-president, Kotak Mahindra Bank.Bali estimates that a borrower with an RS 10 lakh, 3-year car loan will see their rate fall by RS 200-250, thanks to the interest rate reduction.Throughout the term of the loan, it works out to slightly more - Rs 7000-9000. But given that the average size of car loans and personal loans are RS 4 lakh and Rs 3 lakh, respectively, will RBI initiative does not spell big savings.For existing home loan borrowers, the interest rates play out in two ways. Banks can reduce EMI or loan tenure. Taking the tight phases between March 2010 and October 2011, when the RBI hiked rates 13 times, some banks extended loan tenure up to 30 years, which in some cases exceeded the borrower's retirement. "Banks will first try and bring down the tenure to 20 years without changing EMI, "said Jaideep Iyer, senior president, finance and deputy CFO, Yes Bank.Some home financiers, but feel that the banks can reduce the tenure for existing and older patrons, rather than for the first time, young borrowers. "For example, a 48-year-old borrower whose loan tenure is 15 years old have higher chances of employment reduction than EMI reduction," says Jayanth Pai, vice-president of Parag Parikh Financial Advisory Services. EMI or tenure reduction would also be a function of the amount of home loan exposure, the bank or financial institution.


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