Subtle Tactics Employed by Banks on your Home Loan EMIs

Taking a house loan is one of the biggest financial decisions you'll ever make, and anything that can ease this process comes as a great relief. When the RBI slashed repo rates by 50 basis points, it was happy news for home buyers and builders.

The real estate industry of India is expected to see a surge, as more and more house buyers take home loans to buy property of their choice. If you've been planning to do so, you might first want to learn whether your lending institution will actually follow the policy. For that, let's learn how RR work.

What is Repo Rate?

RR is the rate at which RBI lends money to financial institutions across the country. NBFCs need to borrow money from RBI in order to ensure smooth cash flow and proper functioning of their organization. However, RBI tends to increase the repo rate to discourage lenders from borrowing money, which has the tendency to disrupt the country's economy.

Why Should you be Concerned about Slashed Repo Rates?To be able to understand this question, you first need to understand how RR work. Lending institutions have to deposit a certain amount of their customers' money with the RBI and this is known as the Cash Reserve Ratio or CRR. Now when repo rates are slashed, the CRR amount also comes down. In such a case, NBFCs reduce your interest charges as they don't have to deposit a huge amount in CRR.

In this situation, banks should be reducing house loan interest rates, but clearly, they haven't. Read on to know why.

How are Banks Cheating You?When RBI announced a slash in their RR, bank and other financial institutions were immediately asked to reduce their interest. However, it was noticed that when RBI cut down the RR, only a few banks reflected the same change in their loan rates. In the year 2012, RBI reduced RR by.50%, but bank only reduced a mere 0.25%. Again in the 2013, RBI reduced repo rates by 0.25%, but financial institutions increased their interest from around.25% to.30% instead.

Contrastingly, if you go back in time a little further, between the year 2010 and 2011, RBI hiked RR by as much as 3%. And, to nobody's surprise, banks were prompt in increasing their interest rates immediately. RBI noticed that while banks were active when it came to increasing interest and decreasing fixed deposits rate, they hardly reduced.

As a consumer, you might not be able to keep a tab on all these tricks used by banks; however, you can definitely keep yourself abreast of all the latest announcements by RBI. If your bank doesn't offer a rate cut when the same has been announced by RBI, it's time you shifted to a new NBFC or financial institution. Remember, even a small decrease in your interest rate will make a major difference to your savings.

Also, when you're applying for a new house loan, compare different lenders and remember to check your home loan eligibility criteria and house loan EMI.

Arwind Sharma is a financial advisor with an experience of more than 7 years. He has worked for topmost financial firms in India and has been a visiting faculty at many reputed institutes in India.