However, banks have refrained from cutting their Marginal Cost of Fund based lending rate (MCLR) which are largely offered to companies inbid to protect their profit margins.
Mumbai: The Equated monthly instalments (EMIs) on your home, car, education and personal loan is set to reduce as several banks have announced their decision to cut lending rates for retail borrowers after the Reserve Bank of India (RBI) cut the repo rate after a gap of nearly five years. Repo rate, the rate at which the central bank lends short term money to commercial banks, was cut by 25 basis points to 6.25 per cent last Friday. Top banks such as Bank of Baroda, Punjab National Bank, Union Bank, Canara Bank, Indian Overseas Bank, UCO Bank, Bank of India have cut their repo linked lending rate (RLLR) by 25 basis points. The country’s largest lender State Bank of India chairman CS Setty has also said that the bank will revise its lending rates linked to the external benchmark lending rate this month itself.
However, banks have refrained from cutting their Marginal Cost of Fund based lending rate (MCLR) which are largely offered to companies inbid to protect their profit margins.
The rate of interest for various retail loans linked to Bank of Baroda and Punjab National Bank’s RLLR effective February 10 would be 8.9 per cent (Current RBI Repo Rate: 6.25 per cent + MarkUp/Base Spread of 2.65 per cent). However, Punjab National Bank has also cut its MCLR by 5 basis points effective Feb 1. Canara bank has revised RLLR to 9 per cent, Bank of India to 9.35 per cent, Union Bank of India to 9 per cent. Indian Overseas Bank has reduced its RLLR from 9.35 per cent to 9.10 per cent.
While the new borrowers will be offered loans at lower rates, the exact date of rate cut transmission to the old borrowers would depend on the rate reset dates set by their respective lenders. Till then, they will continue to service their loan as per their existing rates.
As per the central bank’s mandate issued in 2019, banks have to link their retail loans (such as home loans, car loans) to external benchmark lending rates (EBLR) which is mostly the repo rate of the RBI (RLLR). Banks can offer a spread on the repo rate based on the borrower’s profile.
Anil Gupta, senior vice-president, co-group head (financial sector ratings) at ICRA said, “The loans linked with EBLR will get re-priced as early as next month and latest by April 1. But the spread over EBLR could vary for old and new borrowers. The MCLR linked loans, which are largely lent to corporates, have different resetting mechanism. MCLR linked loans will typically reprice as per the frequency of the underlying benchmark. For example, a 3-month MCLR linked loan will get repriced after every 3 months.”
“On the deposit side, we should start seeing transmission from April onwards as Q4 is a busy season for banks and the liquidity is typically tight during this period. In such a case, banks will not hurriedly lower deposit rates. After April, they may start cutting the deposit rates. You can expect deposit re-pricing for short term deposits first and maybe if another rate cut happens, then banks may cut longer term deposits also,” added Gupta.
