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Loans get cheaper as banks reset rates

Even ahead of the monetary policy review meeting next Tuesday, loans are are set to become cheaper as banks switch from the base rate to a marginal cost of funds-based rate (MCLR). State Bank of India (SBI), Bank of Baroda and HDFC Bank were first off the block to announce their MCLRs on Thursday. While the MCLR for SBI and HDFC Bank is 9.2% for a tenor of one year, at BoB the rate is at 9.3%. While for SBI and HDFC Bank this is a fall of 10 basis points over the base rate, for BoB the fall is a much sharper 35 basis points.

Paresh Sukthankar, deputy managing director, HDFC Bank, observed that vis-a-vis the base rate, the MCLR would be somewhat lower reflecting the slight fall in the cost of deposit over the last quarter. “So to that extent, loans will become cheaper for customers,” Sukthankar said.

PS Jayakumar, MD & CEO, BoB, pointed out that since there is an adjustment for tenors, the rates could vary from client to client depending on the kind of loan being taken. “However, for similar risk, it would be fair to say the general direction is downwards. Since the cost of deposit has fallen, the rates will be lower,” Jayakumar said, adding that there will be a sharper focus by banks on the risk premium from now on.

At SBI, home loans are now expected to be priced at 9.45% — one-year MCLR plus a spread of 25 basis points. Currently, SBI offers home loans at 9.55%, based on the base rate of 9.3% plus a 25 bps spread. Rajnish Kumar, managing director, SBI, told FE the bank will retain the current spreads. “With a 25 bps spread, our home loans will be 10 bps lower than it is now and will be reviewed every month henceforth,” Kumar explained.

Bankers explain that in the MCLR regime the difference in the lowest lending rates of banks narrows. For instance, while the difference in the base rates of SBI and BoB was 35 bps, under the new regime this has fallen to 10 bps. The cost of deposits is what determines the MCLR and banks have been lowering their deposit rates for more than a year now. SBI’s deposit rate for a maturity of up to one year is now 7.25%, for BoB it is 7.3% while for HDFC Bank it is 7.5%. The share of low-cost deposits is critical since most banks pay customers just 4% on these. At SBI, current and savings accounts account for 42.7% of its total deposits while for BoB the proportion is 30% and at HDFC Bank it is a high 40%.

For floating loans, banks may offer loans with reset dates linked either to the date of sanction of the loan or to the date of review of MCLR. RBI had also asked banks to price fixed rate loans up to three years on marginal cost of funds and to review and publish their MCLR of different maturities every month on a pre-announced date. Under MCLR, banks will have to take into account their cost on incremental deposits across various maturities. At SBI, the MCLR will range between 8.95% and 9.35% for loans of various tenors, overnight to three years. At BoB the range is between 9% and 9.65% and for HDFC Bank it is 8.95-9.35%.

According to ICRA data, the top five lenders in terms of market share are SBI and its subsidiaries (19%), HDFC Group (18%), LIC Housing Finance (9%), ICICI Bank (9%) and Axis Bank (5%) as of June 2015. The housing loan market in India (including priority sector loans) is valued at `7.35 lakh crore, according to RBI data. HDFC’s base rate was benchmarked to the marginal cost of funds though there were some differences in its method of calculation and that of the RBI.