ICICI Bank Ltd. has reduced its marginal cost of funds lending rate (MCLR) by 70 basis points across tenors, joining a handful of other banks in offering cheaper loans.
ICICI Bank's one-year MCLR, the benchmark for retail loans, now stands at 8.20 percent, according to a press release sent out by the bank Monday. The rate being offered by ICICI is 20 basis points higher than the lowest in the industry–State Bank of India's 8.0 percent. A basis point is one hundredth of a percentage point.
Among the other private sector banks, only Kotak Mahindra bank has cut its lending rate so far, by 20 basis points to 9.0 percent.
Banks are lowering lending rates following the flood of deposits they have received after the government announced a withdrawal of Rs 500 and Rs 1000 notes on November 8. A large portion of these deposits have come through current and savings account deposits (CASA), and have brought down the cost of funds.
Also read: Sharp Lending Rate Cut Won't Be Rolled Back, Says SBI Chief.
Improving Transmission Of Lower Rates
With both public sector banks and private banks lowering rates, the transmission of rate cuts by the Reserve Bank of India (RBI) has also improved. Since the start of 2015, the RBI has cut rates by 175 basis points and its benchmark repo rate now stands at 6.25 percent.
In a report released on Monday, brokerage house Motilal Oswal noted that the process of transmission is more or less complete.
Since June 2014, RBI has cut benchmark rates by 175 basis points; with the current round ofMCLR cut, the lending rate cut is ~200 basis points and deposit rate cut is 200-225 basis points. Hence,banks have largely completed the transmission. Further, if the CASA collected underdemonetization were to remain stickier than expected and in turn shift to termdeposits, there could be further deposit rate cut (including savings rate cut). Fall incost of funds will further reduce the lending rates in the system (to boost volumes).Motilal Oswal Report
However, most banks have so far cut their MCLR and not their base rates, which means that existing borrowers may not immediately benefit from the lower rates.
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