India's biggest lender State Bank of India or SBI has reduced its MCLR (Marginal Cost of Funds based Lending Rate) by 10 basis points. This will come into effect from September 10. The one-year SBI MCLR will be 8.15% per annum with effect from 10 September. This is the fifth consecutive reduction in MCLR from SBI so far in FY 2019-20. Other banks are likely to follow SBI's lead and could lower their MCLR rates. SBI also lowered its fixed deposit or FD rates by 20-25 basis points.
SBI claims to have around 35% and 36% of market share in home loans and auto loans respectively.
MCLR rates are based on the bank's own cost of funds. If you are an existing home loan customer of SBI, the latest cut of 10 basis points in MCLR may not lower your home loan interest rate or EMIs immediately.
SBI's floating rate home loans are typically linked to its one-year MCLR and it will have a one-year reset clause. If the reset clause is in August and the MCLR cut happens in September, your home loan rate will not change till next August.
The RBI recently directed all banks to link all new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans to Micro and Small Enterprises from October 01, 2019 to external benchmarks, saying banks had not satisfactorily passed on the benefit of recent policy rate cuts to consumers.
The RBI, which has reduced its benchmark repo rate by 110 basis points since February, has pushed for better transmission of rate cuts. Under the new mechanism, the RBI said banks are free to decide the spread over the external benchmark.
Under this new loan regime, borrowers will get the immediate benefit of RBI's rate cuts but when the rate cycle turns, they will be hit by rising interest rates faster than the MCLR-based loans.
SBI already has a repo rate-linked home loan product, which is linked with RBI's repo rate. The interest rate on this SBI home loan product changes upwards or downwards, in line with movement of RBI's repo rate. The loan is linked to SBI's own repo-linked lending rate, which is 225 basis points over repo rate. The bank also charges a spread above the repo-linked lending rate.