Two of the countries largest lenders State Bank of India (SBI) and HDFC Bank have chosen to reduce their base rates, bringing relief to a number of existing customers.
SBI has brought down its base rate by 15 basis points (bps) to 9.10 percent effective April 1. HDFC Bank has reduced its base rate by 25 bps to 9 percent, according to a notification on the bank's website.
Banks had brought down the marginal cost of funds lending rates (MCLR) sharply in January by as much as 90 basis points as easy liquidity conditions brought down the marginal funding cost. This has now flowed through into the average cost of funds for banks, allowing them to reduce their base rates as well.
While banks migrated to the MCLR system in April last year, a large proportion of loans, particularly retail loans, remains linked to the previous base rate system. As such, a reduction in base rates tends to impact existing customers more while a reduction in MCLR benefits new borrowers.
In the case of SBI, about 15 percent of retail floating rate loans were pegged to the MCLR as of January, while the remaining were linked to the base rate.
While some banks, like Bank of Baroda, Canara Bank, and Bank of India are yet to review their rates, others, like ICICI Bank have chosen to keep their rates unchanged.
Kotak Mahindra Bank has reduced its MCLR by 20 basis points to 8.80 percent, and Union Bank of India has cut its one-year MCLR by 15 basis points to 8.50 percent with effect from April 1.
Demonetisation of Rs 500 and Rs 1000 notes on November 8 led to a surge of deposits into the banking system, which brought down the cost of funds for banks. While in the initial days, cash withdrawals were limited, these restrictions have now been removed. Early indications suggest that despite withdrawal limits being lifted, banking system liquidity remains comfortable. According to SBI's research department, there will be a permanent liquidity injection of least Rs 1.7 lakh crore (1.1 percent of GDP) post demonetization into the banking sector.
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