In signs of increasing transmission, State Bank of India (SBI) and ICICI Bank on Friday announced cuts in loan rates for new borrowers. Both lenders will lower their marginal cost of funds based lending rates (MCLRs) with effect from November 1.
SBI will prune its MCLR by up to 15 bps to 8.9% — for one year — now the lowest in the industry. ICICI Bank will reduce its MCLR by up to 10 bps to 8.95%. The country’s most valuable bank HDFC Bank, which will revise its MCLRs on November 7, currently has a one- year MCLR of 9.05%.
The fairly aggressive reduction of lending rates by SBI comes just a few days after it cut term deposit rates by up to 10 bps. Effective October 24, SBI pays an interest of just 7.05% on one year term deposits, the lowest rate of interest on one year money since early December, 2010. Both HDFC Bank and ICICI Bank currently offer 7.25% for the same.
SBI offers lowest rate
Bank One-year MCLR (%) One-year deposit (%)
State Bank of India 8.90 7.05
Punjab National Bank 9.25 7.25
Bank of Baroda* 9.35 7.3
Canara Bank 9.3 7.15
HDFC Bank 9.05 7.25
ICICI Bank 8.95 7.25
Axis Bank 9.2 7.25
Kotak Mahindra Bank 9.5 7.25
Indusind Bank 9.65 7.35
* Bank of Baroda levies a strategic premium of 0.25% over and above MCLR
In order to achieve monetary transmission by ensuring that lending rates are sensitive to policy rates, the Reserve Bank of India (RBI) has made it mandatory for banks to adopt the MCLR as the benchmark for lending, instead of the base rate, from the April 1, 2016. The central bank had to introduce the MCLR because despite a 125 bps cut in the repo rate in CY15 — from 8% to 6.75% — banks brought their base rates down by a maximum of only 70 bps. SBI for example, reduced its base rate from 10% at the beginning of 2015 to 9.3% by the end of the year.
The primary reason for the base rate not being very sensitive to policy rates is because it allows banks to calculate the cost of funds based on the average cost or marginal cost or any other methodology. This effectively meant they waited for deposits to get repriced and consequently late cuts are delayed. While MCLR is also primarily a function of cost of resources, it is based on the marginal cost of money.