By Jayraj Patel
India’s largest public-sector Bank SBI cut its base Rate by 30 points (100 base points = 1.0 percent) on the first day of the new year, as mentioned on the company’s website. The base rate decreased from 8.95 percent to 8.65 percent per annum. The move will reportedly benefit more than 80 lakh borrowers directly.
A new year gift
Parveen Kumar Gupta, SBI’s Managing Director for Retail and Digital Banking said on Monday, “The reduction in the base rate is a New Year gift to the bank’s loyal customers, as a large number of consumers who have their loans linked to the base rate will benefit. This reduction is part of the bank’s efforts to ensure transmission of the reduction in policy rates of the recent”.
The base rate is defined as the minimum rate that the banks must charge its lenders. It incorporates all the fundamental elements that affect the returns to a bank. The base rate system was introduced to the Indian banking system in 2010 after it overtook the Benchmark Prime Lending Rate (BPLR) system, which proved to be inefficient in bringing transparency to the lending process.
Earlier this year in August, SBI had announced that it would waive off the loan processing fees on most of its retail loans under its ‘festival bonanza’ scheme. For home loans, SBI normally charges 0.35 percent of the total loan amount as processing fees, between Rs 2,000 and Rs 10,000. It was initially declared that these charges would be exempted for all new borrowers till 31st December 2017. However, in addition to the base rate cut, the bank also decided to extend this waiver by three months, until 31st March 2018.
Effects of this move
Being the country’s leader in banking, a rate cut of this measure will attract other smaller private and public banks to follow suit and introduce base rate cuts in order to keep their loan offerings attractive for potential borrowers. Udit Kariwala, a senior analyst at the India Ratings and Research Foundation confirmed the notion to the Business Standard, stating, “SBI being the industry leader, a rate cut by SBI is usually followed by similar actions by other banks“.
The move is mainly going to benefit all those borrowers who had applied for a loan before 1st April 2016, as banks had then adopted the Marginal Cost of Lending rate (MCLR) system, which was pushed by the Reserve Bank of India to further bring down interest rates. Harish Roongta, an investment advisor told the Business Standard, “Even after the latest cut, customers on the base rate should shift to the MCLR regime, where they can get better rates’ justifying that the MCLR regime has proved to be beneficial for Indian borrowers“.
Since 2015, RBI has decreased policy rates by approximately 150-200 basis points, whereas banks, in turn, have passed on the benefits to customers only partially, around 100 basis points. SBI’s new year gift for 2018 is expected to cause a chain reaction that may force other banks to be compassionate as well.
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