State Bank of India (SBI), HDFC Bank, Punjab National Bank, Bank of Baroda and Canara Bank announced cuts in lending rates on Thursday as a new rule to calculate interest kicked in, raising hopes of lower EMIs for millions of borrowers.
According to the new rules, effective from Friday, banks will have to fix their “base rate,” the floor rate to which all lending rates are linked, on “marginal cost” or the interest rates banks offer to new deposits.
This is different from the existing system where banks were fixing the base rate on the “average cost” that includes all existing borrowers.
The new marginal cost-based system of fixing interest rates is aimed at enabling banks to fully pass on the central bank’s rate cuts to final consumers.
The RBI has cut its key lending rate — the repo rate — by 1.25 percentage points since January last year, but banks have reduced their average lending rates by only 0.60 percentage points.
More rate cuts could be in the offing with the RBI widely expected to cut interest rates in its monetary policy review next week aided by easing inflation rates.
Consumer price index (CPI)-based retail inflation, a measure of changes in shop-end prices that the RBI tracks for interest-rate related decisions, grew at a slower 5.18% in February against 5.69% in January.
SBI, the country largest lender, announced its new rates on Thursday effectively bringing down loan rates by up to 0.30 percentage points starting at 8.95% for overnight tenures and 9.30% for loans up to two years.
HDFC Bank also revised one-year loan rates to 9.20% and two-year rates to to 9.30%.
According to some experts, high tenure loans (of 10-20 years) may see a reduction of about 0.10 percentage points.
“Any borrower who will choose 1 year re-set, lending rates will come down by about 10 basis points (0.10 percentage points). Home loans, term loans to small and medium enterprises and and mid-corporates will largely fall into this category,” said Parag Jariwala, vice-president, institutional research, banking and financial Services, Religare Capital Markets.