State-owned lender Bank of Baroda (BoB) on Friday trimmed its base rate by 10 basis points (bps) to 9.5%, according to a stock-exchange notification. The rate cut will benefit borrowers who had taken loans before April 1, 2016 and who have not switched to the marginal cost of funds-based lending rate (MCLR) regime as yet. The differential between BoB’s one-year MCLR — which stands at 8.35% — and the base rate still remains at a high of 115 bps.
The last round of base rate cuts by major banks came in April, when State Bank of India (SBI) had trimmed its base rate by 15 bps to 9.1%, HDFC Bank by 25 bps to 9% and Axis Bank by 10 bps to 9.15%. Despite the series of cuts, the lowest base rate in the system – HDFC Bank’s 9% — is higher than the one-year MCLR of most banks, except that of IndusInd Bank and Dhanlaxmi Bank, both small lenders.
Base-rate cuts are typically viewed as efforts by lenders to restrict borrowers from switching to the MCLR. While fresh loans sanctioned after April 1, 2016 are supposed to be MCLR-linked, a majority of loans in the system remain tied to base rates. As on March 31, SBI had 50% of its loan book linked to MCLR, up from 40% at the end of December. The corresponding figures for March for other large borrowers was not immediately available.
Of late, a large number of older borrowers, especially retail borrowers have put in requests to make the switch from base rate to MCLR. Speaking to analysts after SBI’s financial results for FY17, chief financial officer Anshula Kant had said, “Typically, in the fourth quarter, a lot of review/renewals happen, at which time, many loans have moved from base rate to MCLR. So, it has jumped by 10% in one quarter,” adding that the first half of FY18 will be slow in terms of migration to MCLR. Most accounts that had not migrated would be retail loans and some fixed-income loans, she had said.