SBI cuts base rate by 30 basis points
Mumbai: Loans to existing borrowers are set to get a little cheaper with the State Bank of India (SBI) reducing its base rate by 30 basis points on Monday, a move that is likely to be followed by other banks.
The move is also unlikely to benefit new borrowers whose loan rates are linked to the so-called marginal cost of funds-based lending rates (MCLR). One basis point is a hundredth of a percentage point.
SBI’s revised base rate now stands at 8.65%. The lender has kept MCLR for January unchanged at 7.70-8.10%.
After the base rate cut, for a home loan of Rs30 lakh with a 20-year tenure, the equated monthly instalment (EMI) will come down to Rs877 per lakh from Rs897 per lakh.
“The 25 basis point reduction in retail term deposit rates in November gave us room to reduce base rate,” said P.K. Gupta, managing director at SBI. He added that the base rate reduction is expected to benefit eight million customers, most of whom are home loan borrowers.
Since April 2016, banks have moved to the MCLR system as the base rate regime was found to be rigid and weak in terms of passing on rate cuts effected by the Reserve Bank of India (RBI). Though some borrowers have migrated to MCLR, many, especially in the retail segment, continue to use the base rate, banking analysts said.
“Usually, whenever SBI reviews lending rates, we have other banks, especially private sector and larger public sector ones following the direction. Around 30-40% loans in the industry are still linked to base rate. If other lenders don’t cut the base rate, borrowers may opt for MCLR,” said Udit Kariwala, a senior analyst at India Ratings and Research.
Many borrowers have already moved to MCLR, countered Ashutosh Mishra, a banking analyst at Reliance Securities.
The impact of SBI’s move will be “small”, he added.
Indeed, lending rates are unlikely to trend downward unless there is a sharp revival in credit growth and higher loan volumes make up for lower rates. Deposit rates, too, have to come down to facilitate lower lending rates.
“The way government bond yields have moved and the fact that policy rate is not expected to come down because of inflation worries, I think the ability of banks to cut loan rates at this point of time looks constrained. Additionally, for banks to cut loan rates, reduction in deposit rate is required. This again looks unlikely because systemic liquidity has dried up,” said Rajiv Anand, executive director, retail banking, at Axis Bank.
Retail inflation surged to a 15-month high of 4.88% in November. Rising oil prices and fears that the government may breach its fiscal deficit target of 3.2% of gross domestic product has prompted analysts to predict that RBI will hold interest rates for the rest of this financial year.
SBI’s move to cut the base rate comes at a time when a committee set up by RBI in October recommended linking bank lending rates to a market benchmark in a bid to hasten monetary policy transmission as well improve transparency in rate setting by lenders.
The panel, headed by Janak Raj, principal adviser, monetary policy department, recommended that all floating rate loans advanced from April be referenced to one of three external benchmarks—a risk-free curve involving rates on treasury bills, certificate of deposits rates or the central bank’s policy rate.
The panel pulled up banks for “arbitrariness” in calculating the base rate and MCLR, the two existing benchmarks to which retail lending rates such as car loan and home loan rates are fixed. The spreads charged over these internal benchmarks “has undermined the integrity of the interest rate setting process”, it said.