Interest on SBI's MCLR linked loans set to reduce

New Delhi, Sep 09: The State Bank of India (SBI)'s lending rates are likely to come down as India's largest PSU bank has announced a reduction in its Marginal Cost of Funds-based Lending Rate (MCLR) by 10 basis points (bps).

The one year MCLR would come down to 8.15 percent per annum from 8.25 percent p.a. with effect from 10 September, 2019.

RBI implemented MCLR on 1 April 2016 to determine rates of interests for loans. It is an internal reference rate for banks to determine the interest they can levy on loans.

Last week, the RBI mandated banks to link new floating rate personal and retail loans to an external benchmark from October 1, 2019. The external benchmark can be the RBI's repo rate, the 3-month treasury bill yield or the 6-month treasury bill yield. Up until now, loans were linked to the bank-specific benchmark - MCLR (marginal cost of funds-based lending rate).

ICICI Bank had last week cut its lending rates by 0.10 per cent across all maturities. The rates were cut across all tenors under the marginal cost of funds-based lending rate (MCLR) system.

With this cut, which comes amid repeated RBI nudges to slash rates, the total quantum of rate reduction by the bank since April stands at 0.20 per cent.

Under the revised rates, effective September 1, the bank's one-year MCLR will come down to 8.55 per cent, while the overnight MCLR will be 8.30 per cent.

The one-year MCLR is considered important from a retail loans perspective, as a bank's long-term loans like home loans are linked to this rate.

Its larger rival HDFC Bank's one-year MCLR stands at 8.60 per cent as of now, while the same for the third-largest private sector lender, Axis Bank, is at 8.55 per cent.

ICICI Bank had last reviewed its interest rates in the first week of July, when it effected a 0.05 per cent reduction.

The RBI was disappointed with banks for not passing on the lower rates to borrowers, despite four successive rate cuts of 1.10 per cent in 2019 and 0.85 per cent since April.

Banks at times decided to pass only a part of policy rate cut to borrowers as was witnessed in the last few monetary policy cycles. The new loan regime should hopefully put an end to woes of the customers, who had to continue paying higher interest rates despite RBI cutting its policy rates because of the lending bank's reluctance to pass on the rate cut benefit.