DeMo benefit: SBI, others cut lending rates steeply
Home loan rate could drop to nine-year low of 8.20 per cent
The New Year has ushered in a lower rate regime. A day after prime minister Narendra Modi asked banks to prioritise lending to the poor and the middle class, several state-owned banks on Sunday cut their lending rates. More banks are set to follow suit.
The country’s largest lender, State Bank of India (SBI) announced a steep 90 basis points (0.90 per cent) cut in the marginal cost of funds based lending rate (MCLR) across all maturities. Punjab National Bank (PNB) cut its MCLR rates by 70 basis points soon after.
Another state-owned lender Union Bank of India had last week reduced its one-year MCLR by 65 basis points, or 0.65 per cent to 8.65 per cent. Sources say the government is nudging state-owned banks to cut lending rates as they have garnered huge deposits in the wake of demonetisation.
On Friday, IDBI Bank and State Bank of Travancore had announced a cut in lending rates. IDBI Bank will charge 9.15 per cent on one-year loans against 9.30 per cent now, its three-year MCLR rates have been revised to 9.3 per cent per annum down 0.40 per cent; while six-month loans have been pegged at 8.9 per cent down 0.35 per cent.
MCLR is the benchmark rate to which all loans are linked. A cut in MCLR helps all new borrowers get the benefit of lower interest rates for all kinds of loans. By the MCLR method, banks will have to price loans on the marginal cost of deposits rather than the average cost of deposits. In the rate-cutting cycle that began on January 2015, the RBI has brought down the repo rate cumulatively by 175 basis points, however the base lending rates of banks had come down only by about 75 basis points till a few months ago. However post-demonetisation in November, banks have been flushed with deposits.
Some news reports say banks have garnered Rs 14.9 lakh crore deposits after demonetisation.
With its new MCLR cuts, SBI has reduced its benchmark rate by 200 basis points from January 1. For SBI, its one-year MCLR rates are now 8 per cent per annum against 8.90 per cent, while for two-year loans are at 8.10 per cent and three-year maturities at 8.15 per cent, SBI said in a statement.
In a stock exchange filing on Sunday, PNB said its one-year linked MCLR rates stand revised to 8.45 per cent against 9.15 per cent earlier. Similarly, three-year MCLR stands reduced to 8.60 per cent compared to 9.30 per cent, five year rate has been revised to 8.75 per cent. “Since November 1, 2016, the reduction in MCLR is 85 basis points,” PNB said.
While an MCLR cut would benefit new borrowers, old borrowers have two options to get the benefit of lower rates.
A senior official of SBI explained, “Old borrowers at the base rate have an option to continue at their old rate and after completion of one year they will be automatically moved to the MCLR rate and thus get the benefit of lower MCLR rate. But if they want the benefit of Sunday’s lower rate, then they have to pay a small negotiated fee, which today is 50 basis points. We are reviewing this fee.”
For home loans up to Rs 75 lakh, SBI home loan rate for women borrowers is 20 basis points above one-year MCLR and 25 basis points for others. For loans above Rs 75 lakh it is 35 basis points above one-year MCLR rate for women borrowers and 40 basis points above one-year MCLR for other customers. Assuming SBI continues with the same risk premium/spread, its home loan rate for loans up to Rs 75 lakh would be 8.20 for women and 8.25 per cent for others.
The prime minister had, in his address, said: “While respecting the autonomy of banks, I appeal to them to move beyond their traditional priorities and keep the poor, lower middle class and middle class at the focus of their activities."
He added: “India is celebrating the centenary of Pandit Deendayal Upadhyay as Garib Kalyan Varsh. Banks should also not let this opportunity slip. They should take appropriate decisions in public interest promptly.”
In a bid to ensure that banks fully pass on the benefit of rate cuts from the central bank to borrowers in the form of lower lending rates, the Reserve Bank of India (RBI) in April 1, 2016 introduced the MCLR loan pricing system.
Vibha Batra, an independent analyst explained, “MCLR will see a greater reduction this year as last year’s (lower) deposit rates will start getting reflected this year. Also, credit demand remains low. Remonetisation will take at least four-five months. With credit demand being soft, I expect a significant reduction in both lending and deposit rates."
With demonetisation and government pushing for cashless transactions, the currency in circulation will fall. Bank credit growth is expected to be in the range of 6.5-7 per cent in 2016-17, according to many economists.
The credit growth for the current quarter has been under pressure. The growth in advances for the fortnight ended December 9 was only 5.4 per cent year-on-year and on a year-to-date basis the loan book of the industry has declined by 2.5 per cent or around Rs 1.91 lakh crore in absolute terms. With corporate shying away from incremental borrowings due to the economic slowdown and retail credit also taking a back seat, overall credit growth for FY17 is likely to remain under pressure and may be at par with GDP growth, said Siddharth Purohit, senior research analyst at Angel Broking.
Another variable is the differential in MCLR and one year commercial paper rate which stands at 2.5 per cent and has to converge and so that both lending and deposit rates can fall.
“But if a bank has a large amount of Non-performing assets (NPA), it will have to balance between cutting lending rates and asset quality pressures,” added Batra.
P Mukherjee, MD & CEO at Lakshmi Vilas Bank, said, “Interest rates will fall with so many variables, including the impact of demonetisation. The slowdown resulting from demonetisation is a big reason to cut rates. In deposit rates, already the calendar year saw a downward movement with banks cutting deposit rates by 50-100 basis points depending on various maturity buckets. I expect a similar quantum of reduction in deposit rates in 2017-18. Our rates are still higher than the US rates. There is still a big gap and so space to cut rates further by the RBI.”
falaknaazsyed@mydigitalfc.com
Columnist: 
Falaknaaz Syed
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