Banks cut rates, to roll out repo-linked loans

Mumbai: Liquidity surplus and continuous rate cuts from the central bank is propelling banks to cut their lending rates, with several of them also announcing plans to introduce repo rate linked loan and deposit product.

On Friday, state owned lenders-Bank of India, Andhra Bank, Allahabad Bank, Syndicate Bank, Indian Overseas Bank and Canara Bank cut their Marginal Cost of Funds (MCLR) based lending rate. Another lender Union Bank issued a statement saying that it expects to further cut its MCLR by 15 basis points and would soon link its housing and vehicle loan portfolio to the repo rate from the current MCLR.

In the last two days, State Bank of India (SBI), IDBI Bank, Oriental Bank of Commerce and Bank of Baroda have cut their MCLR rate. The rate cuts from lenders come after the central bank on Wednesday reduced the benchmark repo by an unconventional 0.35 percentage point to a nine-year low of 5.40 per cent.

While Allahabad Bank has reduced its MCLR by 15 to 20 basis points, Andhra Bank and Syndicate Bank cut their MCLR by 25 basis points across all five tenors—overnight, one month, three months, six months and one year. Andhra Bank’s MCLR is now 7.95 per cent against the earlier 8.20 per cent. The revised MCLR for Allahabad Bank will be effective August 14 with its one year MCLR cut by 15 bps to 8.40.

Allahabad Bank also cut the rate of interest on retail term deposits by 10 bps across all buckets in more than 1 year effective September 1.

Bank of India said that it has cut the one-year MCLR where more than 80 per cent of its loan book sits by 25 bps, effective August 10.

Indian Overseas Bank reduced its MCLR by 15 basis points in one year to 8.50 per cent and 10 basis points in below one year tenors.

Canara Bank cut its MCLR by 10 basis points across all tenors, effective from August 7. Its one-year MCLR has come down to 8.50 per cent from 8.70 per cent earlier.

Syndicate Bank said that it would be launching repo rate-linked deposit and loan products. IDBI and Oriental Bank of Commerce cut their MCLR by 5 bps to 15 bps across various tenors. Similarly, Bank of Baroda, had cut its MCLR with effect from August 7 by 15 basis points, with the new one-year MCLR rate at 8.45 per cent.

While the cut in MCLR would benefit new borrowers of housing, vehicle, personal and business loans among others, the old borrowers are unlikely to get an immediate benefit but would see a reduction in their Equated Monthly Instalments depending on their reset clause timing. For example if you are an old home loan borrower whose floating rate home loan is linked to one-year MCLR and your one-year reset clause is in June, despite your bank announcing an MCLR cut in August, your home loan rate will not change till next June. Moreover, banks typically adjust the tenure of the loan instead of the EMI, based on the movement of rates.

The Reserve Bank of India in its third bi-monthly monetary policy on Wednesday had cut the policy repo rate for the fourth straight time in a row, this time by an unconventional 0.35 per cent to arrest the all pervasive slowdown in the economy. By adding this rate cut, in total, the central bank has reduced the repo rate by 1.10 per cent since February.

However banks have been slow in passing on the benefit of lower rates to their borrowers. According to the RBI data, banks have cut their loan rates for new borrowers by only 29 basis points during the current easing phase.