State-run lender SBI today announced a move towards marginal cost of funds based lending rates (MCLR), with effect from April 1, 2016, in line with a Reserve Bank policy that called for a shift to the new regime.
As per the new mechanism, SBI said its MCLR would range from 8.95 percent to 9.35 percent for loans of different tenors, ranging from overnight to three years.
In December last year, the RBI had laid out guidelines for banks to move towards the MCLR, starting April 1. The move was aimed at making transmission of monetary policy quicker and more effective, as banks price their lending rates after taking into account bond/money market rates that may have moved following an interest rate decision.
So far, banks had followed a variety of methods to calculate their base rates, such as weighted average cost etc. This had made them slow to respond to rate cuts effected by the RBI -- for instance, last year, the central bank cut its repo rate by 125 basis points (1.25 percent). But banks had on average cut rates by an average 50 basis point.
Banks have maintained that monetary policy transmission has been weak as a bulk of their borrowing has traditionally been through deposits rather through the market, which slows down the speed of reduction in cost of funds, in the face of a rate cut.
But on average, analysts say a move to MCLR is expected to reduce lending rates by about 10-15 basis point.In an interview with CNBC-TV18's Latha Venkatesh, SBI MD Rajnish Kumar said that earlier, the base rate had no linkage to maturity but now banks will announce MCLR based on tenor.Below is the transcript of the interview on CNBC-TV18.Latha: You have announced marginal cost lending rates (MCLR) for three years at 9.35 percent, for two years at 9.3, one year at 9.2 percent and so on. So this is no change at all. You have just recalculated the current base rate as MCLR? A: No, it is not like that.Latha: Because of this new MCLR, are any of the lending rates for those who have home loan -- EMIs -- with you going to change?A: Yes, because the base rate for one year is 9.20 and the reset for home loans currently, we are planning that there will be a one year reset for the home loans. So, there will be some revision in the EMIs.Latha: What was the base rate for these guys, the home loan guys?A: Home loan base rate will be 9.20 -- I mean MCLR will be 9.20 with one year reset. Latha: Until now those who took the loans until yesterday were based at 9.3?A: They were based on 9.3 plus 25 basis points premium, so 9.55.Latha: So now it is 9.2 plus 25?A: Yes, so strategy remains unchanged. If we have reduced rate by 10 basis point, so 9.55 will become 9.45 for all those who take loan who are sanctioned loan from April 1 onwards.Latha: Did I get you right? Those who have taken loans yesterday there the base rate was 9.3 and a 25 basis premium for the home loan and they would have borrowed at 9.55; their rates will not come down to 9.45. However, those who take the loan tomorrow will get it at 9.45, right?A: Yes.Latha: Will any of the other guys also have a similar advantage other than home loans?A: Whoever borrows April 1 onwards -- any loan which has been sanctioned and disbursed starting from April 1 -- they will be linked to the MCLR. MCLR comes with different options. It could be one year reset; it could be six months reset and for two year and three year this is a reference rate essentially for arriving at a fixed rate.Even if you want a fixed rate you need a benchmark. So, this will serve more of as a benchmark and up to one year this will be the reset frequency.Sonia: Will this cut in rates impact State Bank of India (SBI) margins and could you quantify it for us?A: No, that quantification we have not done as of now because it all depends how do we manage our liabilities and it is a function of managing the assets and liabilities and there will be more emphasis and shift towards matched funding so that your net interest margins (NIMs) can be protected. Sonia: Do you see more lending rate cuts after the Reserve Bank of India (RBI) policy as well, not just by SBI but for the industry as a whole?A: Industry wise you have to review every month. If RBI cuts rates then there again will be a review in asset-liability committee (ALCO) and every month you have to set the MCLR. So, there is a formula which has been given by the RBI, so, it is a derived value as per that formula and what is your deposit rate that will also be important. Latha: Starting tomorrow, your two year and three year loan borrowers also get things cheaper, if I were a borrower yesterday taking a two year loan from you what would have been the rate and what will it be tomorrow or day after?A: Earlier the base rate was not having any correlation with the maturity. Everything was linked to the base rate. However, when you do it to two year, three year, five year, the consideration is about the tenure premium. Latha: I just want a bottomline, tomorrow will a guy borrowing two and three year loan get it cheaper than he got it day before yesterday or will it be the same rate?A: It could be both because MCLR covers certain cost components but the risk premium is the spread which banks will be charging over the MCLR. So, risk profile of the borrower will have a bearing on what is the interest status.Latha: Then in that case if there is an Reserve Bank of India (RBI) rate cut -- this is a separate question from MCLR -- should we expect further deposit rate cuts from you?A: That is a question, which right now I cannot answer because when there is a rate cut from RBI or any such development happens, we have our ALCO meeting which takes into account things like what is our position in the market in terms of deposit accretion, what is the competition doing, etc. All those considerations are taken into account and only then, you can take a call. For your information right now, the deposit rates for SBI are one of the lowest in the market.Latha: What is the bulk of your tenure of your loans? Are they normally one year loans, which are the ones that are most likely to be impacted by this MCLR?A: All the top rated corporate or even home loans or P segment loans -- so this benefit of whoever gets one year reset options, so at least immediately 10 basis point differential in there.
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