Banks slash rates in New Year gift; SBI leads and PNB, Union Bank follow

The country’s largest bank State Bank of India (SBI) announced a steep interest rate cut in several years on Sunday, by reducing its marginal cost of funds based lending rate (MCLR) by 90 basis points (bps) across all maturities. 

With this cut, SBI has passed on benefit of 200 bps since January 2015 to customers, which is more than 175 bps reduction in the Reserve Bank of India’s (RBI) policy rate cut in the same period. 

The new rates come into force from today. SBI’s one-year MCLR stands reduced to 8% from 8.9%, while the rate on overnight loans is now 7.75%, against 8.65%. 

Banks are flush with funds after the note ban, with Rs 12.4 lakh crore having been deposited with banks till December 10. SBI chairman Arundhati Bhattacharya said, “There is huge liquidity with the bank due to the large flow of deposits. This has driven us to reduce lending rates, which, hopefully, will kickstart credit demand and growth.” 

Two other public sector lenders - Punjab National Bank (PNB) and Union Bank of India - also slashed their MCLR rates on Sunday. Delhi-based PNB cut lending rates by 70 bps, while Mumbai-based Union Bank reduced its MCLR by 65 bps to 90 bps across different tenors. 

Senior bank officers said other lenders would follow suit and reduce loan rates by 50-100 bps to remain competitive. Also, the actual benefit to borrowers will be lesser than the extent of the MCLR cut due to the spread that banks charge over the loans rate. 

The large deposits that came into banks since November 8 had raised expectations that banks would have room to cut lending rates, which is seen as vital to increase credit growth and spark a revival in private investments. 

According to SBI officials, it has received about Rs 1.5 lakh crore in low-cost deposits in current and savings accounts (CASA). The share of CASA in SBI’s total deposits was 42.74% in September 2016, which has now gone up to 45%. 

SBI executives said the bank would cut home loan rates tomorrow, while the decision to cut rates on other retail products like vehicles and consumer durables would be based on competition and risk premium. They also said the sops announced by government for affordable housing and cheap credit, are expected to push the demand for housing loans. 

Banks are facing a challenge of deploying the large amounts that are lying with them after the scrapping of Rs 500 and Rs 1,000 notes. Bhattacharya said the credit demand remains weak now. This money when invested in market would give a little over 6% returns, while the same money given as loan would fetch more returns. 

SBI would also review interest rates on deposits depending on the liquidity conditions, Bhattacharya said. 

According to RBI’s data, credit expended by 5.8%, on a year-on-year (YoY) basis, till December 9, 2016, down from 10.6% a year ago. The credit offtake has been tepid after November 8, as the note ban has caused a shock in the economy. 

In case of deposit flows, the situation is exactly opposite of what happened in credit. Deposits have surged by 15.9% (YoY) till December 9, up from 10.9% a year ago. 

Repo Rate			SBI Lending Rate
Date	in %		Date	in %
Jan-15	8.00		Jan-15	10.00
Jan-15	7.75		Apr-15	9.85
Mar-15	7.50		Jun-15	9.70
Jun-15	7.25		Oct-15	9.30
Sep-15	6.75		Sep-16	9.10
Apr-16	6.50		Oct-16	9.05
Oct-16	6.25		Nov-16	8.90
			Jan-17	8.00
Sources: SBI, RBI