A New Year gift from SBI: 30 bps cut in base rate
MUMBAI: State Bank of India ushered in a happy new year for about 8 million borrowers with a sharp cut in lending rates for existing customers that will help prevent rivals from poaching them, but it’s unlikely to significantly alter costs for others.
The reduction in base rate will benefit nearly half of all home loan borrowers at the nation’s largest lender with debt linked to the base rate. The base rate, below which it does not give loans to prime customers, was lowered by 30 basis points to 8.65%, the country’s largest bank said on Monday. A basis point is one-hundredth of a per-centage point.
With this reduction, SBI’s base rate is the lowest among banks and that could lead to reductions by rivals. SBI last revised its base rate by 5 basis points on September 28, which led to Andhra Bank and Bank of Baroda following suit.
“The reduction in base rate is a new year gift to the bank’s loyal customers as a large number of consumers who have their loan linked to base rate will be benefited by decrease in rates,” said PK Gupta, managing director, retail and digital banking, SBI.
“This reduction is part of the bank’s efforts to ensure transmission of reduction in the policy rates in the recent past. Approximately 80 lakh customers will be benefited by this move,” he said.
RBI’s Criticism of Lenders
The cut will help SBI retain customers who could be tempted to switch by lower interest rates offered by rivals or non-banking finance companies, which have seen their costs fall dramatically.
It may also quell criticism by the regulator and customers that banks have not been passing on the benefits of a fall in market interest rates in the past two years.
Reserve Bank of India governor Urjit Patel said banks have scope to reduce borrowing costs further at the last monetary policy review in December, a point that that RBI has been making for some time now.
Almost half of SBI’s longterm retail borrowers, especially those who have availed of student and home loans, pay interest linked to the base rate. The remainder have migrated to the marginal cost of funds based lending rate (MCLR) system. Under this, rates are locked and revised at the end of each year for small borrowers while there’s a monthly reset for big corporates.
The central bank had in 2016 instructed banks to migrate to MCLR based on a complicated formula that captured the cost of funds and operations to ensure that policy actions were beneficial to borrowers.
Between December 2014 and October 2016, a month before demonetisation, the base rate of banks on average dropped 0.61 percentage point when the policy rate was lowered by 1.75 percentage points, according to RBI data, underscoring the argument that cuts were not being fully passed on. Each bank has different MCLRs for varying periods.
For SBI, the MCLR ranges from 7.7% for overnight borrowing to 8.1% for three years. All new loans are granted at MCLR+risk.
The central bank has, however, been critical of the MCLR regime adopted by the banks.