Many banks, including country’s largest lender State Bank of India (SBI), have cut their lending rates, following a deluge of deposits after the notes ban. The rate cut by banks come after Prime Minister Narendra Modi on Saturday in his New Year’s eve address to the nation asked banks to “keep the poor, the lower middle class, and the middle class at the focus of their activities,” and to act with the “public interest” in mind.
SBI, the country’s biggest lender by assets, on Sunday cut its lending rates by 90 basis points for maturities ranging from overnight to three-year tenures. After the rate cut, SBI has reduced marginal cost of funds based lending rate (MCLR) to 8 per cent for one-year tenure, from 8.9 per cent.
Banks use the one-year benchmark for home and car loans. They add a margin above their MCLR to price retail loans. This is the lowest benchmark rate for SBI in six years. Under a new lending rate regime effective from April 1 of last year, banks price their lending rates based on marginal cost of lending rate (MCLR), which is closely linked to the actual deposit rates.
In case of SBI, as the home loans are linked to one-year MCLR, the interest rates customers pay are locked in for 12 months. Older loans get the benefit of the revised rates after the one-year lock-in ends.
SBI in total has cut its benchmark lending rate by 200 basis points since January 2015.
Other public sector lenders Punjab National Bank (PNB) and Union Bank of India (UBI) too have brought down the benchmark interest rate by up to 0.9 per cent. PNB has cut its one-year MCLR rate by 0.7 per cent to 8.45 per cent from 9.15 per cent. Similarly, Union Bank of India has reduced its MCLR by 0.65-0.9 per cent. The revised one-year MCLR stands at 8.65 per cent.
Finance Minister Arun Jaitley claimed the note ban was a success and the results were showing now. He said demonetisation had increased the “lending capacity of the banks and naturally the cost of capital will come down”.
Welcoming rate reduction by banks, Economic Affairs Secretary Shaktikanta Das said in a tweet, “Trend of interest rate reduction follows demonetisation. Banks have substantial quantum of low cost funds now.”
“Welcome reduction of interest rates by SBI. Loan disbursements expected to pick up. Positive for the economy,” he added.
Last week, SBI’s subsidiary State Bank of Travancore had announced reduction in the lending rate, followed by another public lender IDBI which cut base interest rate by up to 0.6 per cent.
Analysts say that with Reserve Bank of India (RBI) likely to cut rates further this year in the wake of falling inflation, banks may further reduce their lending rates. The surge in deposits will allow banks more leeway to pass on RBI rates cuts than before.
The RBI has not yet released the final numbers of deposits banks have attracted after the notes ban, which took out 86 per cent or Rs. 15.44 lakh crore out of circulation. The deadline for depositing old 500, 1,000 rupee notes ended on December 30. Banks had garnered close to 12.5 lakh crore deposits in banned notes till 10 December, the RBI had said earlier.