After initial dithering, banks are now falling in line to cut interest rates after the RBI asked them to do so last month. A low interest rate cycle is on the anvil with a majority of banks now settling to cut lending rates by 5-10 basis points.
More banks will follow suit and they will have to cut the rates on MCLR (marginal cost of fund based lending rate) not on the spread as was done by the largest lender State Bank of India, said a bank CEO whose bank recently reduced its rates.
Some banks have already done so and some are in the process of doing so but by March 31, most of them, or even all of them - private or PSUs - will have cut the rates by 5-10 basis points, said the banker, adding that the RBI Governor's meeting last month on supporting economic growth by the lenders has been forceful on them on a different paradigm.
At least four PSU banks and one private bank will cut this week, said another banker. The RBI urged us to follow the rate cut and support the growth of the economy; some benefits can be passed without hurting our spreads and margins, observed the banker.
Interest rates on home loans are linked to the MCLR rate, the base rate and the bank's spread, so the effective rate of interest on the loan varies according to the banking benchmark rates.
Bank of India, HFDC Bank, ICICI Bank and Bank of Baroda are yet to take a call on reducing MCLR rates. In fact Bank of Baroda had upped its marginal cost of funds-based lending rates by up to 20 basis points with prior to the RBI's MPC (monetary policy committee) meeting.
Bankers also say though they face high provisioning due to non-performing assets (NPAs) and have little headroom, they would do their best to pass some portion of the rate cut to the borrowers. But passing the entire cut in the repo rate of 25 per cent is not possible as they need to protect their margins. Banks did not cut their MCLR rates following a 25 basis point cut in repo rate by RBI in the fifth bi-monthly policy review in February, raising questions on the effectiveness of the RBI step if these reductions were not to be passed on to home loans or retail lending rates to boost growth.
Banks did inform RBI that there is huge gap between deposit (6.1 per cent) and credit growth (9.3 per cent) which prohibits from cutting the rates. The attractive rates on small savings and Provident Funds also results flight of depositors from banks. The SBI rate cut of just 5 basis points is on spread and not benchmark rate and will not impact all borrowers. A banker said SBI has cut in spread and not on MCLR as, without reducing the deposit rate, it is not possible to cut the MCLR.
Most recently, Union Bank of India reduced lending rates by 10 basis points whereby it has cut its one year MCLR or the minimum lending rate, against which most of the consumer loans are benchmarked, to 8.60 per cent from 8.70 per cent. It also reduced the base rate from 9.10 per cent to 9 per cent. The new rates are effective March 1, 2019.
Private sector lender Kotak Mahindra Bank has lowered its lending rate by a marginal 5 basis points, taking its new one year MCLR to 9 per cent.
Punjab National Bank (PNB) has reduced the MCLR by 0.10 percentage points for loans of various tenors. The one-year tenor loans have been cut to 8.45 per cent from 8.55 per cent.
Allahabad Bank has also cut MCLR by 10 basis points for all the tenures up to three years with effect from March 1.