Setting the stage for another round of cut in lending rates, State Bank of India (SBI) — the country’s largest lender — on Monday announced a sharp cut of 25 basis points in its external benchmark-based rate (EBR) to 7.80 per cent per annum from 8.05 per cent per annum, effective January 1, 2020.
As a result of the move, new homebuyers will now be able to avail themselves of home loans beginning 7.9 per cent, which is 25 basis points lower than the current offering of 8.15 by SBI.
“With this reduction, interest rate for existing home loan customers as well as MSME borrowers who have availed loans linked to External Benchmark Based Rate would come down by 25 bps,” said SBI in a statement.
On December 9, SBI reduced its Marginal Cost of Funds-based Lending Rate (MCLR) by 10 basis points.
While EBR is linked to repo-rate, MCLR is based on the banks cost of funds.
Other banks also joined the move to cut rates following SBI’s move, Indian Bank announced a downward revision in its MCLR with effect from January 3, 2020. While it revised its MCLR to 7.90 per cent as against the existing 7.95 per cent for overnight tenors, for tenors of one year it would be revised to 8.3 per cent from the current 8.35 per cent, Indian Bank said in a BSE filing.
Other banks and housing finance companies are also expected to follow the move.
While SBI had introduced floating rate home loans from July 1, 2019, the lender had adopted repo rate as the external benchmark for all floating rate loans for MSME, housing and retail loans from October 1, 2019, after the Reserve Bank of India (RBI) mandated all banks to link a certain categories of loans to external benchmark-based interest rate.
Decision to prompt other lenders to follow suit
A sharp cut in lending rate by SBI comes despite the RBI taking a pause in its December monetary policy announcement. While it shows that banks are still catching up to the repo rate cuts by RBI, the decision by the largest lender is set to prompt others to follow suit and thereby benefit the existing and new homebuyers.
The RBI decision came after the regulator noted that the banks were delaying the transmission of reduction in repo rate by the RBI. Repo rate is the rate at which the RBI lends to commercial banks.
Between February and October, the RBI has cumulatively reduced repo rate by 135 basis points but the weighted average lending rate (WALR) on fresh rupee loans sanctioned by banks declined by 44 basis points so far.
While the RBI did not go for another rate cut in its December policy and took a pause, it said, “Going forward, transmission is expected to improve with the introduction of the external benchmark system, as most banks have linked their lending rates to the policy repo rate of the Reserve Bank.”
In the past, the RBI has accepted that monetary transmission has remained staggered and incomplete.
A look into the RBI’s successive statements show that the transmission in WALR on fresh rupee loans of commercial banks has remained slow. If the transmission was 21 basis points out of the cumulative 50 basis point cut in repo rate in February and April 2019, the RBI in its August statement said that banks reduced their WALR on fresh rupee loans by 29 bps during February-June 2019.
There was been no transmission of the 35 basis point cut in repo rate in August. In its October policy, the RBI said, “As against the cumulative policy repo rate reduction of 110 bps during February-August 2019, the weighted average lending rate (WALR) on fresh rupee loans of commercial banks declined by 29 bps”.
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