SBI Rate Cut: Other Banks Will Follow Soon?

State Bank of India (SBI), which is India’s largest bank, has recently reduced the marginal cost of funds-based lending rate (MCLR) by 5 basis points (bps) across all the tenors. SBI has also cut its home loan rate by 10 bps for loans of up to Rs 30 lakh. The new rate for housing loans will be 8.6-8.9%, from 8.70-9 percent earlier

The bank’s one-year MCLR has been cut from 8.55% to 8.5%, which is effective from 10th April. Therefore the cost of all loans linked to the MCLR got reduced. Since February in 2019, banks, both private and public sector, have been cutting their MCLR marginally. The largest private sector bank HDFC Bank Ltd had also recently reduced its MCLR by 5-10bps. The bank’s one-year MCLR is now revised to 8.7%.

The reduction in the rate for home loans means that the EMI over a 15-year tenure will now start at Rs 29,718 in place of Rs 29,895 (at 8.7% interest). The total reduction in the interest payable over the loan term is approximately Rs 32,000.

However, existing home loan customers may have to wait for the time being to see an impact on their EMIs because of the reset date factor. The interest rate of the loan for the borrower is changed only on the reset period, which is generally one year. So, the loan rate will get reduced only after 12 months from the reset date.

Meanwhile, the Reserve Bank of India (RBI) has last week reduced the repo rate by 25bps, which means that SBI’s cash credit and overdraft will also get reduced by 5bps with effect from 1 May. The savings bank rate will also be revised to 3.5% for balances up to ₹1 lakh and 3.25% for above ₹1 lakh.

In March, when RBI had cut the repo rate, SBI and IDBI had revised its MCLR, had also reduced the interest rates for home loans. During that day only, Bank of Baroda (BoB) had announced that it will cut its benchmark lending rate. Punjab National Bank (PNB), Allahabad Bank, Kotak Mahindra and Union Bank of India had also cut their MCLR that time.

Effects of Cut in the SBI lending rate

The cut in the lending rate cut will also affect the estimated 22 million depositors of SBI, as their interest rates will also get slashed by 25 basis points to 3.25% from existing 3.5%. The bank has around 440 million savings bank accounts, of which 5% are in the above Rs 1 lakh category, on which the bank had decided to cut the rates. However, the bank decided to maintain their deposit rates at 3.5% for saving bank accounts below Rs 1 lakh.

This on back of low deposit growth and banks cannot lose their depositors due to the tight liquidity conditions in the market. However, even if the deposit rates, are reduced by the banks, effect would be seen with a lag, which means only new deposits will be repriced at a lower rate and the old deposits will continue getting the earlier rate.