No Joy For Borrowers This Festive Season; Lending Rates Fall Slow And Steady

Lending rates are not likely to come down in a hurry even though the Reserve Bank of India (RBI) cut its policy rate by another 25 basis points this week. Bankers say that while rates are heading lower, the movement will not be dramatic.

Banks review their lending rates once a month, as per the marginal cost of funds lending model, which came into effect on April 1 this year. The lending rates are changed on the basis of the change in the banks' cost of funds.

On Tuesday,RBI Governor Urjit Patel said that transmission of interest rate cuts had happened effectively in the money markets, but that “transmission to bank borrowers has been less than any one of us would have liked it to be”.

The RBI's 25-basis-point reduction was the sixth reduction in the policy rate since January 2015. On the whole, since then, the RBI has cut the repo rate by 175 basis points. One basis point is one hundredth of a percentage point.

Since the monetary policy announcement on Tuesday, ICICI Bank, Kotak Mahindra Bank, and Canara Bank have reduced their base rate by 5-10 basis points. ICICI Bank's one-year marginal cost of funds lending rate now stands at 9.05 percent, while that of Kotak Mahindra Bank is at 9.40 percent and Canara Banks's is 9.60 percent.

“SBI has already cut its MCLR (marginal cost of funds lending rate) by 5 basis points on October 1. Next whatever will come, will be (on) November 1. We are already the lowest in the industry,” said Rajnish Kumar, managing director at State Bank of India, the country's largest lender.

“We can't really say what the reduction in the rate will be, but it won't be a large reduction. We will have to monitor how the costs move. Only recently we cut the bulk deposit rates, so let's see,” he said.

State Bank of India has reduced its one-year lending rate by 95 basis points since January 2015, and it now stands at 9.05 percent.

Banks have been criticised for not effectively transmitting rate cuts by the RBI. Some have cited high costs associated with non performing assets, and low demand for large corporate loans as hindrances to cutting rates further.

“Banks have been bringing down the MCLR rates as their cost of funds has come down. So you don't look at one event, one rate cut,” said Shanti Ekambaram, president of consumer banking at Kotak Mahindra Bank. “Although there has not been any rate cuts over the past few months, banks have been bringing down 5 basis points here and 5 basis points there.”

Will Festive Competition Drive Rates Down?

According to Pralay Mondal, senior group president, retail and business banking at Yes Bank, some banks may choose to cut rates more on account of the competition during the upcoming festive season. These banks will also factor in the likelihood of another rate cut this financial year, he said.

Banks may also choose to offer customers special festive deals. SBI has already launched a scheme called “hope loans”, said Rajnish Kumar.

These loans bear interest rates based on the latest MCLR rate. According to the bank, the effective interest rate for home loans would be 9.25 percent for women and 9.30 percent for men. The bank has waived the processing fees on hope loans for automobiles. Home loans taken for SBI approved projects will also benefit from a fee waiver.

“The rate cut has come after all the banks have gone live with their festive season offers. I think banks have already been out there offering very competitive rates on home loans, on personal loans, whether it is in terms of processing fees, whether it is in terms of interest rates and EMIs, there have been very attractive offers,” said Ekambaram.

“Banks will keep fine tuning their offers as they go by. But right now it is reasonably competitive in the market.”