India’s top two banks, ICICI bank and SBI bank, today announced a cut of 0.10 percent and 0.15 percent in their lending rates respectively under a new system of computation. This move has further lowered borrowing costs ahead of the busy season. Private sector lender ICICI Bank was the first to announce a cut of 0.10 percent in its marginal cost of funds based lending rate (MCLR) across tenors, which was followed by a similar move by the country’s largest lender SBI, but by a larger measure of 0.15 percent.
According to the revised rates, the one-year MCLR which determines a slew of products including home loans for SBI stands at 8.90 percent, while the same for ICICI Bank are at 8.95 percent. The revised rates are effective from November 1 in case of both the banks. SBI has kept the overnight MCLR, which is the most lucrative offering, at 8.65 percent, while the one month is at 8.75 percent. The three-month MCLR has been fixed at 8.85 percent and six months at 8.90 percent. The overnight MCLR for ICICI Bank is at 8.75 percent and six months MCLR is at 8.95 percent. The announcements are a response to the repeated displeasure shown by the regulator of RBI for not passing on the benefits of cuts to borrowers. This move by both the banks will give a boost to the sagging economic growth.
The MCLR was introduced by the RBI from April this year as a transparent and effective alternative, after banks refused to pass on the benefits of its rate cuts to the borrowers. Even after the introduction of the MCLR, the central bank continues to be concerned on the issue of transmission, which was flagged by Governor Urjit Patel, at his maiden policy review this month. “I agree that the transmission through bank lending has been less than anyone of us would have liked to”, Patel told. “We are hoping that over the next quarter or two, keeping in mind the government has also reduced the small savings rates, the MCLR itself will now throw up more transmission“, he added.
Banks are given a set formula to compute the MCLR based on cost of funds and are required to review it on a monthly basis, when the calls on the new rate structures are taken. Since January 2015, the RBI has reduced repo rate by 175 basis points, including the recent cut, but banks have reduced their base rates only by 60 basis points.
Apart from the launch of the new model called MCLR, the regulator of RBI should put pressure on other banks (government and private alike) to follow suite. The lower the lending rate, the more people and businesses will be able to borrow. This will give a boost to the Indian economy as well as to the employment rate in India as the more businesses grow, the more people they will be able to employ. If all the banks implement this strategy especially before the busy season in India, it will make a big, positive change to the Indian economy. Read more on Startups