ICICI Bank cuts home loan rates: How real is the rate cut?

HOW REAL IS THE RATE CUT BY BANKS? The country's largest private sector lender ICICI Bank announced a revision in its new home loan rates to 9.65% for a loan of upto Rs. 5 cores for salaried borrowers from 9.90% earlier. This reduction in lending rates follows a base rate cut undertaken by the bank last week, when it lowered its base rate by 35 bps to 9.35% from 9.70% effective October 5. To understand the impact of an interest rate reduction on a borrower, one has to look at the lending rates. Just like a reduction in RBI's repo rate does not result in an equal transmission by banks,  the lowering of base rate does not imply an equal cut in a customer's borrowing rate.  What we saw in the case of SBI a few days back and ICICI Bank now, the new  customers have not been given the entire benefit of the base rate reduction by the respective banks. For instance, a 35 basis points cut in ICICI Bank's base rate did not translate into an equal lowering in the bank's lending rate for new customers. Instead, the bank haas made up for the lower base rates by increasing the spreads charged on lending rates. While the home loan rate before the recent base rate cut was at 9.90% (which was calculated using the formula of base rate+0.20%), the new home loan rates at 9.65% are priced using the formula of Base rate (9.35%)+ 0.30%. The move comes at a time when both the government and the RBI have been pressing banks to transmit the benefit of lower rates to their customers. Just last week, State Bank of India came under attack for not passing on the entire benefit of the 40 basis points reduction to their new borrowers. SBI reduced its home loan rates to 9.55% from 9.75% earlier, passing on only a 20 basis point benefit. HDFC Ltd also reduced its rates by 25 bps to 9.65% for its home loan customers effective October 6, at par with ICICI Bank.The other interesting thing to note is the effective date of transmission of these rate cut benefits to borrowers. Most of the banks, in their base rate cut announcements, have set October 5 or October 6 as the effective date of the cut. Depending on the reset clause in the original loan agreement, an existing borrower pays EMIs on his/her loan either on a monthly basis or on a quarterly basis. Hence, when a bank cuts rates effective on a particular day of the month which is not the first day of the month, the benefit will only come to the customer starting next month or next quarter, depending on the reset clause in the loan agreement.