Whether you are planning to purchase a new car or a home the first thing that you look for is your budget. You might have saved a good amount but seeking the high prices of the assets availing loan has become unavoidable these days. The fluctuating rate of interest on Home loan or Car loan is another concern as it decides how much money you will end up paying to the Bank. Every now and then the Financial news broadcast on the change of CRR & Repo Rate and how it may affect the EMI of your loan.
However, for a layman, these terms comes as a code which is hard to crack. If you too are seeking housing or car loan and are confused about how the RBI guidelines regarding CRR and Repo Rate change affects your affordability, here is everything you should know about How do CRR and Repo rate affect the EMI for housing and car loans:
To proceed further first we need to understand what does the terms CRR & Repo Rate defines:
What is CRR:
CRR is an abbreviation used for Cash Reserve Ratio. It is the amount of total cash every commercial bank has to maintain as reserve. Bank cannot lend this money to anybody also cannot earn interests or profit on it. It is expressed as percentage of total deposits of bank. The central bank of the country has the power to set any changes on Cash Reserve Ratio. In India RBI regulate CRR for every commercial bank.
What is Repo Rate:
Repo Rate also known as RR is that specific rate at which any commercial bank borrows money from the central bank in case of shortage of cash. Bank take loan from central bank. This loan is generally rendered for a short period by the RBI. If the repo rate increases the cost of borrowing of the bank increases and hence cringe their profits.
How do CRR and Repo rate affect the EMI for housing and car loans?
The bank sets the interest rate on the housing and car loans accordingly to their lending power. Now, each bank has a targeted profit to earn every year. When the CRR & RR are increased by the Central Bank (Reserve Bank of India in the case of India) the banks have lesser funds (liquidity) available to lend. Hence the bank has to raise the interest rates to attain its yearly profit.
Let us understand it with an example:
Let us assume a bank ABC Pvt. Ltd. has a target to earn 20 crores of profit in a financial year.
Now Condition 1: The current CRR is 4% and RR is 8%.
Suppose the total money deposited in ABC Pvt. Ltd bank by public = 100 crore
ABC Pvt. Ltd bank gets long term loan from Central Bank= 100 crore
Total Cash set aside as reserve by the ABC Bank as per CRR = 4 crore
Interest rate paid by the bank on borrowing of 100 crores = 100 crores *8% = 8 crore
| Total funds with the bank | 100+100 = 200 Crore (A) |
| When CRR is 4% (amount to be maintained as reserve in cash) | 4 crore (B) |
| When Repo Rate is 8 percent ( the interest paid to Central Bank) | 8 crore (C ) |
| Money left with the Bank | A-B-C= 188 Crore |
The total money available with ABC bank is 188 crore.
Now Condition 2: Central bank increases CRR & RR. The CRR is 8% and RR is 20%.:
Suppose the total money deposited in ABC Pvt. Ltd bank by public = 100 crore
ABC Pvt. Ltd bank gets long term loan from Central Bank= 100 crore
Total Cash set aside as reserve by the ABC Bank as per CRR = 8 crore
Interest rate paid by the bank on borrowing of 100 crores = 100 crores *20% =20 crore
| Total funds with the bank | 100+100=200 Crore (A) |
| When CRR is 5% (amount to be maintained as reserve in cash) | 8 crore (B) |
| When Repo Rate is 20 percent ( the interest paid to Central Bank) | 20 crore (C ) |
| Money left with the Bank | A-B-C=172 Crore |
The total money available with ABC bank is 172 crore.
D
While in the first condition the Bank has a greater pool of cash to lend further, while in the second condition the pool has reduced significantly. However, the yearly target of the bank remains the same.
Bank earns profits by lending money to the public on an interest rate basis. Now for both the conditions the bank has to make a profit of 20 crore at the end of financial year.
Now, let us see in both conditions how the ABC bank will make profit of 20 crore.
| Condition 1 | Condition 2 | |
| Total fund raised by ABC bank | 200 cr. | 200 cr. |
| Cash available with bank for lending | 188 cr. | 172 cr. |
| Profit of ABC bank | 20 cr. | 20 cr. |
| Lending rates to earn that profit | 20/188= 10.63% | 20/172= 11.62% |
From the above table we can see that ABC Pvt. Ltd Bank raises Lending rates or Interest rates on loan from 10.63 % to 11.62% from condition 1 to condition 2. It means when CRR or RR increases the commercial banks raises its Interests rates for loan to maintain their profit. Now let us see what will be the affect on your EMIs for 1% Increase in Interest rates. The below table will help you to understand this. You can also use the online EMI calculator to find the difference in EMIs by interest rates change.
| Home Loan | Car Loan | |||
| Condition 1 | Condition 2 | Condition 1 | Condition 2 | |
| Loan Amount | 30 lakhs | 30 lakhs | 10 lakhs | 10 lakhs |
| Tenure | 25 years | 25 years | 15 years | 15 years |
| Interests rates | 9.5 | 10.5 | 11.5 | 12.5 |
| EMI | 26210.9 | 28325.45 | 11681.90 | 12325.22 |
| Difference in EMIs by Increase in 1% Interests rates | Rs. 2114.55 /month | Rs. 943.32 / month | ||
Hence, higher the CRR & Repo Rate, higher the interest rate & higher the EMI that you have to pay against your home loan or car loan as applicable.
