Mumbai: State Bank of India (SBI), the country’s largest lender, on Tuesday cut its minimum lending rate, or base rate, by 0.25 percentage points to 9.75%, effective 20 September.
This is possibly the first time that SBI is lowering its base rate. After the base rate was introduced in July 2010, the bank has so far adjusted its lending rates in different segments, but resisted a reduction.
The rate cut by the lender comes after the Reserve Bank of India (RBI) reduced the cash reserve ratio (CRR) of banks to 4.5% from 4.75%, releasing about Rs.17,000 crore into the banking system.
CRR is the portion of deposits lenders have to hold with the central bank.
The previous time SBI changed its base rate was in August 2011, when it increased the rate by 0.5 percentage points, or 50 basis points.
“We decided to pass on the benefit of the recent CRR cut to our borrowers,” said SBI chairman Pratip Chaudhuri. “This will also help an effective monetary policy transmission.”
Other banks may have to follow suit and reduce their base rates too, something most of them have resisted so far, arguing that several other rates, including some administered rates, are linked to the base rate. Instead, they have preferred to pass on the rate benefit to individual segments, particularly to retail borrowers.
“SBI rate action can be considered as a signal to the industry. We will respond to the development in the market,” said S. Raman, chairman and managing director of Canara Bank.
SBI cut its lending rate for small and medium enterprises and farmers in June, and for home and auto loans in August.
RBI raised its main policy rate 13 times since March 2010 to tame inflation before cutting its repo rate by a more-than-expected 50 basis points in April.
But even after that most banks did not cut their base rates by the same margin, but chose to reduce their lending rates in some segments.
However, after the central bank reduced its CRR on 17 September, bankers committed to reduce rates, but said the process will start with cutting deposit rates first.
SBI cut its deposit rates by 50-100 basis points in early September.