It is better late than never. Nearly a month after the Reserve Bank of India slashed repo rate, banks have started passing on the benefits, though in small measure, of cheaper interest rates to endusers.
Private sector lender ICICI Bank and the market leader State Bank of India (SBI) have cut their home loan rates by 0.10 per cent and 0.15 per cent respectively. Other banks such as HDFC Bank, Yes Bank, Dena Bank, Corporation Bank and South Indian Bank, among others have also started paring their interest rates.
Under the revised rates, the one-year MCLR, which determines a slew of products, including home loans, stands at 8.90 per cent for SBI while the same for ICICI Bank is 8.95 per cent.
Banks revise their MCLR every month and banks typically lend with a spread of 20 bps to 25 bps on MCLR. The revised rates are effective from November 1, 2016. The Reserve Bank reduced repo rate by 175 points, including the recent cut of 0.25 per cent, but banks have reduced their base rates by only 60 basis points which works out to nearly one third of the total interest easing effected by the central bank.
After the latest interest easing, the home loan rate of SBI has come down to 9.1 per cent — the lowest in six years. The rate cut came on the back of a general interest rate cut last week when SBI reduced its benchmark rates by 15 basis points (100 bps makes one percentage point).
In addition to rate reduction, SBI has waived all processing fees. With this cut, SBI’s cheapest home loans are now 20 bps lower than ICICI Bank and HDFC’s cheapest home loan rate of 9.3 per cent. Rates of all other loans linked to MCLR (Marginal Cost of Funds based Lending Rate) such as auto loans and personal loans would also come down by 15 bps.
SBI’s aggressive cut in home loan rates comes at a time when the banking sector is seeing an extremely sluggish offtake of loans. If the cut is interpreted in terms of equated monthly installments (EMIs), it will work out to a reduction of Rs15 for every Rs1 lakh of loan. The latest round of rate cut will be available only for new borrowers or old borrowers with a floating rate of interest.
The fact that SBI has also slashed interest rates on deposits would hit the interest of small depositors, especially elderly people and women who do not have a regular income and they live off whatever interest their fixed deposits generate.
At present, the SBI’s five-year interest rate on FDI is 130 bps lower than the 5-year post office term deposit rates. SBI has pared the interest rates on FDs to 6.50 per cent on most tenures. If one factors in the inflation, the real return will come down further.
The gap between small savings products and bank deposits has been steadily increasing and the rate cut indicates that the deposit and lending rates are set to fall further in the banking industry.
These cuts in deposit and lending rates come in the wake of Reserve Bank of India slashing the repo rate by 25 bps in October monetary policy review. RBI Governor Urjit Patel had raised concerns about the earlier cuts in bank rates not getting transmitted to retail lending.
In the last one and half years the RBI has cut a cumulative 175 basis point while banks have cut hardly 60 bps in their lending rates.
The cut in home loan rates for new borrowers will not help much as the real estate industry is in a slump now. Builders are sitting on huge inventories as the demand for new houses is tepid.
The expectation that the implementation of the 7th Pay Commission will mitigate the slump in real estate does not seem to be happening. Contrary to expectations, the monsoon this year failed to be bountiful which will mean we cannot expect a substantial raise in farm income.
A raise in private sector salary could help things but that does not look likely now with the economic growth stuttering at 7 per cent. Against this background, the cut in home loan rates by banks may prove unkind.