SBI lowers lending rate by 15bps, loan EMIs set to ease

Home loans, car loans and personal loans are set to get cheaper. Hours after the Reserve Bank of India (RBI) cut key policy rates by 35 basis points (bps) (0.35 percentage points), State Bank of India (SBI), the country’s largest lender, announced a cut in the benchmark rate at which it lends to retail consumer—by 15 bps .

The reduction will make all loans cheaper; for instance, the rate on home loans will come down to 8.25% from 8.4%. On a ₹30 lakh loan over a 20-year period, the savings would be ₹70,000.

Other banks are expected to follow suit

RBI’s rate cut was its fourth successive one since February, and it has so far reduced the rate by a total of 110 basis points or 1.1 percentage points. The last time the bank effected four successive rate cuts was in 2008 and 2009 in the immediate wake of the global financial crisis and the resulting slowdown. Partly because of this, and partly because of a huge fiscal stimulus announced by the government, the economy recovered sharply. RBI will be hoping for a similar recovery this time too—economic growth has slowed since the quarter ended June 2018. SBI and other banks could lower their rates even more in time because the current lending rate cut is happening with a lag. “This rate cut has nothing to do with the 35 bps cut and is linked to the past policy rate cut,” said PK Gupta, managing director, SBI. With SBI reducing rates, other banks are expected to follow suit.

Briefing reporters, RBI governor Shaktikanta Das said that banks have so far transmitted only 29 bps of the 75 bps the central bank shaved off its policy rate between February and July. Banks say this is because deposit rates remain high. “The liquidity situation is good and we hope that the deposit rates can fall further,” Gupta added. Das said he believes banks will cut their rates further in coming weeks.

According to Bank of America Merrill Lynch, a 35 bps RBI cut would send a powerful signal to banks to cut lending rates before the so-called busy season begins in October. However, analysts are of the view that full transmission of the rate cut is unlikely. “RBI has acknowledged that banks’ balance sheet is fragile and full transmission of the rate cut is not possible,” said Ashutosh Mishra, senior research analyst at Reliance Securities.

Existing borrowers whose loans are linked to the MCLR (marginal cost of funds based lending rate) will not see any impact on immediately considering the reset clause. For instance, a loan linked to one-year MCLR and taken out in ,say, June, could see a reset only next June.

However, new borrowers stand to benefit immediately. Experts also recommend that new borrowers opt for floating rate instead of a fixed rate simply because rates will fall further.

Round-the-clock NEFT transfers

Meawhile, RBI has decided to allow round-the-clock fund transfers through NEFT (national electronic funds transfer) from December this year in order to promote digital transactions. Currently, NEFT is available for customers from 8am to 7pm on all working days with the exception of second and fourth Saturdays of a month.