State Bank of India on Monday unleashed a rate war by cutting its home loan rates by 0.9%, betting big on mass migration from other banks, while also maintaining the largest ever spread to ensure increased profitability.
The move by the market leader – SBI is India’s largest commercial bank – is expected to push other banks to follow suit, which could lead to a sharp reduction in interest rates on loans for homes and products, which in turn would stir stagnant sales in real estate and consumer goods. SBI said it expects its loan growth to rise by 1-2%.
From January 1, 2017, SBI is offering interest rates of 8.65% for home loans of up to ₹75 lakh. The cut is based on a reduction in the marginal cost based lending rate (MCLR), which it brought down to 8% from 8.90% on Sunday. MCLR is the new method to calculate rates, replacing the earlier base rate system.
The cut was necessitated by the surplus liquidity that flowed into banks after the government cancelled old notes of ₹500 and ₹1,000. Typically, a cut in MCLR enables banks to offer lower loan rates to new borrowers.
Although only 10% of existing loan products of SBI are based on MCLR, the bank’s premise is that Monday’s cut would bring in new customers.
Going a step forward, SBI also announced new products. “We will bring out the SBI bridge loan, for people who want to upgrade, but are unable to sell their existing house,” SBI chair Arundhati Bhattacharya said.
The interest rates on such loans will be at 10.45% for the first year and 11% after that. The borrower has to find a buyer for the existing house within two years, Rajnish Kumar, SBI’s managing director, explained.
There is also an ‘Insta top up’ loan for existing home loan borrowers, where in a day, the bank offers top-up on existing loans, provided the borrower meets the condition of having a credit score of 700 or higher; the loan amount would be 5% of the home loan.
These top-up loans will attract interest of 1% above MCLR, or around 9%.
The measures are to boost home loan growth, which has been lagging at about 15% to 16%, post-demonetisation, from the previous 20% growth.
To keep profitability, a concern that rattled stock markets which sold bank shares heavily on Monday, SBI has increased the spread – the difference between MCLR rate and the loan rate where banks earn profit – from 0.25% to 0.65%. That is why though the bank cut MCLR to 8%, the home loan borrower will have to pay 8.65% interest.
“At this point this is what we could afford. It is based on our strategy and not on risks... we will see how this works. If competition is high, we may change it later,” Bhattacharya said.
About 10% of the total retail loans and 40% of corporate loans are linked to MCLR. “Our point is that borrowers can move to MCLR. People may not have seen the advantage. Maybe now they will see,” Bhattacharya said.
Borrowers can shift from Base Rate to MCLR by paying a switch-over fee of 0.5%.
Interest rates on car loans will range from 9.10-9.25%. Car loans grew in December, even better than pre-demonetisation and the year-ago period.