Home, auto, personal and other loans are set to become cheaper, in what could trigger consumption demand in a big way in a stuttering economy. A day after Prime Minister Narendra Modi announced big interest subventions for home loans of up to R12 lakh and exhorted banks to keep the poor and middle class at the focus of their activities, three state-owned banks — State Bank of India (SBI) and Punjab National Bank (PNB) and Union Bank of India — on Sunday cut their benchmark lending rates.
While SBI effected a steep 90 basis points cut in its marginal cost of funds based lending rate (MCLR) for January across all maturities, Union Bank of India reduced its MCLR by 65-90 basis points for loans of various tenures. PNB cut its MCLRs by 70 basis points for 1, 2 and 3 year tenures.
Flush with funds thanks to demonetisation, other banks, including private ones, might follow suit soon. Economic affairs secretary Shaktikanta Das tweeted, “Trend of interest rate reduction follows demonetisation. Banks have substantial quantum of low-cost funds now.”
Last week, IDBI Bank and SBI’s arm State Bank of Travancore cut MCLRs by up to 40 bps and up to 30 bps, respectively. One basis point is one-hundredth of a percentage point..
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With Sunday’s decision, SBI’s one-year MCLR will be 8%. The country’s largest lender has reduced its lending rates by 200 bps from January 2015 and its one-year MCLR by 120 bps from April 2016. Women borrowers may now be able to get new home loan from SBI at 8.2% against 9.1% earlier while the interest rate on home loans for others could be 8.25%.
However, SBI managing director Rajnish Kumar said while the bank used to charge a spread of 35 bps on home loans at 9.25%, the spread following the cut was yet to be decided. He said of the total R3 lakh crore deposits in SBI following note ban, R1.4 lakh crore has come in current and savings account (CASA) deposits. This surge in low-cost deposits has allowed the bank to pass on the benefit to its customers. While most banks pay 4% on savings accounts, they do not pay any interest on current account deposits.
“The rationale (for the rate cut) is demonetisation and the lack of credit demand. We want to push demand and believe that the 90 bps cut will help garner demand,” he explained.
Following the cut, SBI’s MCLRs range from 7.75-8.15% for overnight to three-year tenures. Its private sector peers like HDFC Bank and ICICI Bank have their one-year MCLR at 8.9% as on December and are yet to announce their January MCLRs.
According to SBI’s analyst presentation, its home loan book stood at Rs 2.05 lakh crore in Q2 FY17 with a market share of 25.53%.
In his televised address to the nation on Sunday, Modi had 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.”
In a note, investment bank Jefferies had written that the demonetisation-driven inflows into deposits would hasten the process of transmission of the RBI rate cuts, which was earlier expected to take five to six months.
Banks adopted MCLR as their new benchmark lending rate in June, in lieu of the base rate system, for new borrowers.