The country’s two biggest lenders — State Bank of India (SBI) and HDFC Bank — have dropped their base rates by 15 basis points and 25 basis points respectively. HDFC Bank’s base rate is now 9% while SBI’s is a shade higher at 9.1%. ICICI Bank’s base rate is 9.25%. The move is significant since the loans of most of SBI’s customers—approximately 60%—are priced over the base rate and not the marginal cost of funds based lending rate (MCLR). For HDFC Bank, the share of customers whose loans are pegged to the base rate would be smaller.
Even after the cut, the difference between the base rate and the MCLR is at least 100 basis points. Nevertheless, even a 15 basis cut in the base rate would come as a relief to companies, especially to small and medium enterprises, whose cash flows have been stressed in a sluggish economy.
Base rates were last lowered banks in January; while SBI dropped the rate by 5 basis points to 9.25%, ICICI Bank trimmed its base rate by 5 basis points to 9.25%. With interest rates on deposits having trended down significantly over the past year, the cost of funds for banks has reduced meaningfully. SBI’s deposit rate for a maturity of one year now is 6.5%; in August last year it was 7% and in April, 2015, it was 8.25%. After a deluge of deposits following demonetisation in early November, the deposit base is stabilizing. The outstanding value of deposits has fallen to `105.42 lakh crore as of March 17, from `105.84 crore at the end of January 6.
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Meanwhile, despite banks having lowered their MCLR regularly, loan growth has been very slow with demand for both project finance and working capital remaining tepid. Bank credit rose by a meagre 3.68% y-o-y to `75.16 lakh crore in the March 3 fortnight, as against a 4.77% growth in the previous fortnight, the slowest pace in at least 58 years, Reserve Bank of India (RBI) data showed. While the central bank had made it mandatory for banks to use the MCLR as the benchmark, it has failed to stimulate demand. Companies have preferred to borrow in the bond and commercial paper markets since the costs are far lower. Bank loans to individuals recorded their weakest growth in six years in February, growing at just 12% year-on-year (y-o-y) to `15.4 lakh crore,
Rajnish Kumar, managing director, SBI, said that the bank reviews its base rate every quarter and the next review would be held in June. “The base rate cut is owing to the cut in deposits we had effected a few quarters back since it takes around three quarters for the benefits to be passed on to the customer through base rate,” Kumar explained.