State Bank of India (SBI) on Monday reduced its base rate by 30 basis points (bps) to 8.65% in response to a large number of its older borrowers switching to the marginal cost of funds-based lending rate (MCLR) regime. PK Gupta, managing director for retail and digital banking, SBI told a television channel that less than 25% of all loans at the bank are now linked to the base rate. “I think what has happened is that the gap between the base rate and the MCLR has become quite wide, actually. So I think this will reduce that to a large extent,” Gupta said. He added that borrowers have been switching to MCLR in large numbers and the reduction in the base rate would help pass on the benefit of lower rates to customers who have not made the switch. SBI’s one-year MCLR stands at 7.95%. Banks moved to the MCLR framework in April 2016 and all loans made thereafter are linked to MCLR. Since the beginning of FY18, SBI’s base rate has declined by 60 bps. Among other lenders, HDFC Bank, ICICI Bank, Punjab National Bank, Bank of Baroda and Axis Bank have cut base rates in the current financial year. Analysts have seen base-rate cuts as an attempt by banks to restrict the number of borrowers switching to MCLR, which has seen a steeper fall than the base rate since April 2016. For instance, the one-year MCLR at SBI has fallen by 125 bps since April 1, 2016, while the reduction in base rate has been a mere 65-bps.
However, the base-rate cut comes, ironically, at a time when most lenders have begun to raise rates on bulk deposits, anticipating a turn in the rate cycle. Effective Monday, the two largest state-owned lenders after SBI, Punjab National Bank (PNB) and Bank of Baroda (BoB) raised rates on deposits of over Rs 1 crore. One-year bulk deposits at both banks will now yield 5.75%, up from 5% earlier. While PNB left the rate on one-year retail deposits at 6.6%, BoB slashed the corresponding rate by 15 bps to 6.45%. ICICI Bank also raised the rate on one-year deposits of between Rs 1 crore and Rs 100 crore by 20 bps while reducing the rate on larger deposits of the same tenure by 5 bps. All one-year bulk deposits at ICICI now earn 6.7%.
While banks seem to follow divergent strategies for retail and bulk deposit rates, analysts see rates in the system trending upwards in the months ahead. In a note last month, investment bank Jefferies wrote that interest rates can only head higher, even if policy rates do not take that course right away. “To start with, banks would end up absorbing the higher cost of funds in favour of loan growth and NII (net interest income), and cap NIM (net interest margin) improvement for non-banks,” analysts at Jefferies said, adding the interplay of various drivers would ultimately result in NIMs improving for the banks over the next 12-24 months.