In what could be a new year's gift for old borrowers, India's largest lender State Bank of India has cut its base rate sharply by 30 basis points to 8.65 per cent from the earlier 8.95 per cent.
Base rate is the rate below which banks do not lend to customers. While interest rates on most new loans after April 2016 are linked to the bank's marginal cost of funds based lending rate (MCLR), many of the older loans, particularly retail loans, are still linked to the base rate. The rate reduction announced on Monday, will thus help all those people who are still paying a higher interest rate on loans based on the base rate.
Until April 2016, the base rate was used as a floor for setting lending rates. However, in order to facilitate a faster transmission of the changes in RBI's benchmark repo rate, a new MCLR system was introduced by banks.
SBI has not made any changes to MCLR, which currently stands at 7.95 per cent for one year, and 8.10 per cent for three years. The base rate was last reduced by SBI in September 2017 by five basis points to 8.95 per cent and effective January 1, 2018, gets further reduced to 8.65 per cent.
In a bid to further speed up monetary policy transmission, a RBI panel had recommended in October that bank lending rates should be linked to an external benchmark and not leave it to individual banks to decide their interest rates.
“A review of banks’ deposit and lending rates undertaken by the study group indicates that the transmission from the changes in the policy repo rate has been slow and incomplete under both the base rate and the MCLR systems...Banks deviated in an ad hoc manner from the specified methodologies for calculating the base rate and the MCLR to either inflate the base rate or prevent the base rate from falling in line with the cost of funds,” the committee chaired by Janak Raj, principal adviser, monetary policy department, had said.
The committee has recommended that all existing borrowers should be allowed to shift to MCLR-based rates without any fee or conversion charges and post the adoption of an external benchmark from April 1, 2018, banks may be advised to migrate all existing borrowers to the new benchmark, without any additional fees.
