Steep SBI rate cut sets stage for low-cost loans

Indian banks have started cutting lending rates after a massive inflow of deposits spurred by the demonetization of high-value banknotes led to a significant reduction in the cost of funds.

Reduced lending rates on the back of credit sops for a few segments announced by the prime minister on Saturday could potentially kickstart stagnant credit growth, bankers and analysts say.

On Sunday, State Bank of India, the country’s largest lender, cut its marginal cost of funds-based lending rate (MCLR) across all tenors by 90 basis points (bps), the steepest cut in several years. The six-month MCLR is now 7.95% and the three-year rate stands at 8.15%.

A basis point is one-hundredth of a percentage point.

MCLR is the benchmark lending rate at which a bank prices all its loans.

Other public sector lenders Punjab National Bank (PNB) and Union Bank of India (UBI), too, have brought down the benchmark interest rate.

PNB has cut its one-year MCLR rate by 0.7% to 8.45% from 9.15%, effective Sunday. Union Bank of India has reduced its MCLR by 0.65-0.9% to 8.65%. The revised one-year MCLR stands at 8.65%.

Welcoming the rate reduction by the banks, economic affairs secretary Shaktikanta Das said in a tweet, “Trend of interest rate reduction follows demonetisation. Banks have substantial quantum of low cost funds now.”

“Welcome reduction of interest rates by SBI. Loan disbursements expected to pick up. Positive for the economy,” he added.

SBI’s rate cut follows IDBI Bank’s and State Bank of Travancore’s rate reductions on Friday, when they cut their MCLR by 15bps and 30bps respectively. Union Bank of India cut its MCLR by 65-90bps across tenors, and other banks are expected to follow suit.

Since the government on 8 November banned Rs500 and Rs1,000 currency notes, banks have received a flood of deposits—Rs12.44 trillion of deposits in old notes by 10 December, according to the last figure released by the Reserve Bank of India. As of 9 December, the deposit growth rate had widened to 15.9% year-on-year, while credit growth had slowed to 5.8%.

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