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New Year gift: Lower EMIs

The asset-liability committee (Alco) of India’s largest lender, State Bank of India (SBI) is expected to take a call on its lending rates on Thursday.

Indications are that cost of funds of the bank have come down and the flood of deposits will force it to slash lending rates.

This is likely to set the ball rolling with other banks also trying to catch up or come on par with the bank.

A senior SBI official said, “Our Alco is meeting tomorrow. We will take a call on lending rates,” adding that the lending rate for the bank is likely to fall taking into account the deluge of deposits.

Once SBI reduces its rates, it is only a matter of time when ICICI Bank and HDFC Bank will try to match up the rates to stay in the competition.

Other public sector banks like Canara Bank, Punjab National Bank and Bank of Baroda have their Alco meetings in the next one week where they are likely to slash deposit rates and then cut the lending rates.

The lending rates have no option but to fall irrespective of what action the Reserve Bank of India takes. According to the latest bank credit and deposit growth rates put out by RBI, while bank credit growth is steadily shrinking to 5.8% the deposit growth, especially the savings accounts, has swelled by 15.9%. The wide gap shows that the banking system is flush with money and the cost will come down.

The largest private sector lender, ICICI Bank prepared itself for lending rate-cut by cutting its deposit rates to 7.5% for a 390-day fixed deposit and 7% for senior citizens reducing rates by 0.10% to 0.25% on various maturities.

SBI, along with HDFC Bank, ICICI Bank and Axis Bank, has the lowest marginal cost-based lending rate (MCLR) of 8.90% for one year. This is the rate to which most of the loans are pegged.

Experts said lending rates are set to fall in January as banks begin to announce their new MCLR.

MCLR-based lending rate came to effect from June this year, replacing the base rate-based calculation.

Banks are forced to bring down their lending rates as their funding costs come down. Demonetization has led to a flood of deposits into banks, bringing down their cost of funds, which has to translate into lower rates.

RBI introduced it with the objective of expediting monetary policy transmission along with augmenting uniformity and transparency in the calculation methodology of lending rates. These rates are revised every month. Retail home loans where delinquencies are less than 1% for most banks may also see a reduction in rates.

Though savings rates were deregulated five years ago, no bank has moved its rates, except for some private ones like YES Bank and Kotak Mahindra Bank, which offered higher rates of 6% to woo retail depositors.