Banks will not slash interest rates soon

Mumbai: Hopes of your home loan EMIs coming down immediately have been dashed because banks on Tuesday said further reduction in lending rates will take another three months. This is despite the Reserve Bank of India (RBI) cutting the repo rate by 25 basis points and introducing many measures to ease liquidity for banks.

Banks said they had already announced their marginal cost-based lending rates (MCLR) effective this month, which are lower by 50 basis points than base rates and would benefit new home loan borrowers. Existing borrowers, however, would have to wait till banks cut their base rate.

While repo rate is the rate at which banks borrow from the RBI, banks cannot extend credit below base rate. Repo rate has a direct impact on base rate and hence lending rate.

Dena Bank executive director RK Thakkar said, “Banks would first consider cutting deposit rates and once their cost of funds comes down, banks will cut base rate which could take three months.”

Hopes of loans becoming cheaper have got a boost after the government aligned small interest rate on savings schemes to markets, a demand bankers put forth for better transmission of RBI’s policy rate cuts. Hopes were also high because inflation-- another reason for high interest rate-- has remained within the targeted level of the central bank. The Reserve Bank’s 25-basis point cut in repo rate fell below expectation. More disappointment came from banks were non-committal on cutting lending rates.

RBI governor Raghuram Rajan in press conference after announcing the rate cut said that the central bank has reduced rates by 150 bps since the easing cycle began. “Perhaps more important at this juncture is to ensure that current and past policy rate cuts transmit to lending rates.”

“The reduction in small savings rates announced in March 2016, the substantial refinements in the liquidity management framework announced in this policy review and the introduction of the marginal cost of funds based lending rate (MCLR) should improve transmission and magnify the effects of the current policy rate cut,” he said.

IDBI Bank chief financial officer at IDBI Bank N S Venkatesh, said, “Banks have to review MCLR once a month and the rates for April have already been announced. Our median MCLR is 50 basis lower than the base rate. Any further reduction in MCLR will follow a reduction in deposit rates. There is some scope for base rate reduction.”

State Bank of India (SBI) managing director Rajnish Kumar told FC, “The decision on rates will be taken before April 24 in the Alco (asset-liability committee) meeting.”

Indian Overseas Bank executive director Pawan Kumar Bajaj said, “The market had expected a 25-basis point reduction in rates. RBI’s comments being dovish, further 25-50 bps reduction can be expected in the current financial year.

As far as reduction of our rates is concerned, we had reviewed the deposits and done the marginal cost of funds based lending rate (MCLR) calculation very recently. Any further change in the rates will be made only after taking fresh stock of the deposits and it may take two to three months. We had also reduced our base rates last quarter by 25 basis points.”

Federal Bank MD and CEO said Shyam Srinivasan, “We just launched our MCLR rate three days back. The overnight MCLR rate is 9.10 per cent, lower than our earlier base rate of 9.63 per cent. As per the norms, we will review the MCLR next month and take a decision of the lending rates only after seeing whether the deposit rates have come down or are flat. Repo rate is a factor that influences the MCLR rates, but there are other factors that affect deposit rates like competition and business outlook for deposits.

The marginal cost of funds-based lending rate (MCLR) system is expected to impart greater transparency in the pricing of credit and improve the transmission of policy rate into the lending rates. According to the RBI’s monetary policy report , the median overnight MCLR of 26 banks, accounting for about 83 per cent of total bank credit, was 50 bps lower than the median base rate, while the median MCLR across all tenors was lower by 25 basis points.

The government has also decided to remove the spread of 25 bps on select small savings schemes visa-vis G-sec yields of comparable maturities, and introduce a more frequent (quarterly, instead of annual) resetting of the administered interest rates on all small savings schemes effective Q1 of 2016. Administered interest rates on small savings schemes have been marked down by 40-130 bps for Q1 of 2016-17 as compared with those for 2015-16.

A senior official of a mid-sized public sector bank said, “We had already factored the 25 basis points rate cut by RBI in MCLR that are applicable to new loans. While my one-month MCLR is 9.20 per cent, earlier I was charging 9.70 per cent. Old borrowers can switch to lower rates under MCLR by paying a switching fee. Liquidity is still tight. Our ALCO will meet next week to decide on interest rates.”

Vibha Batra, group head of ICRA, said, “For new home loan borrowers, MCLR will be applicable which would change only when incremental cost of funds fall. At the same time, for home loan borrowers where the benchmark rate is linked to base rate may see some reduction in base rate and the proportion of high cost of deposit may come down with respective maturities.”