State Bank of India (SBI), the country’s largest lender, on Monday cut its lending rates linked to the central bank’s repo rate by 25 basis points (bps) to 7.8%, lowering borrowing costs for small businesses and homebuyers.
The new rate, SBI said, will be applicable from 1 January.
“New homebuyers will get loans at an interest rate starting from 7.90%. (previously at 8.15%),” SBI said in a statement. This rate of 7.9% factors in a premium of 10 basis points over the external benchmark-based rate of 7.8%.
A person aware of the development said the 7.9% rate is applicable only to women borrowers for whom there is a concession of 5 basis points; other borrowers would have to pay at least 7.95%.
When SBI had announced the details of its repo-linked home loan scheme in September, the lender said it would charge a spread of 265 bps over the Reserve Bank of India’s (RBI) repo rate. The central bank lowered its repo rate by 135 bps in five consecutive rate cuts between February and October. However, halting its rate-cutting spree, RBI’s monetary policy committee in December decided to wait for past policy actions undertaken by the government and the central bank to play out. RBI’s repo rate now stands at 5.15%.
On 9 December, SBI announced a 10 bps reduction in its one-year marginal cost of funds-based lending rate (MCLR) to 7.9%. It was the eighth consecutive cut in MCLR in FY20. Banks used to follow MCLR norms for setting rates for retail loans before the advent of external benchmarking.
“It is a positive development for the real estate market, especially the housing segment,” said Satish Magar, national president of the Confederation of Real Estate Developers’ Associations of India. “With fewer equated monthly instalments, homebuyers will end up saving as well. This will also help push the much-needed housing demand to an extent.”
The economic slowdown has hit the real estate sector hard, with demand for new housing units slumping in the second half of 2019. According to data from Anarock Property Consultants Ltd, sales in top six cities, including Mumbai Metropolitan Region, National Capital Region and Bengaluru, fell 22% in the second half compared to the first six months of 2019. However, sales in 2019 saw an increase of 5% year-on-year to 261,370 units in the cities cited above.
Meanwhile, transmission of repo rate cuts into lower lending rates for customers has been a bone of contention between RBI and banks. The central bank said in its December monetary policy that it was hopeful of quicker transmission in the days ahead.
According to RBI data, the one-year median MCLR has declined by 49 bps. Meanwhile, monetary transmission has been full and reasonably swift across money market segments and the private corporate bond market. Transmission to money and corporate debt market segments ranged from 137 bps (overnight call money market) to 218 bps (three-month commercial papers of non-banking financial companies), RBI said.
RBI had asked banks to link their lending rates on floating rate loans to retail, personal and micro, small and medium enterprise borrowers to an external benchmark from 1 October. Banks were allowed to choose between RBI’s repo rate, the government’s three-month treasury bill yield published by Financial Benchmarks India Pvt. Ltd (FBIL), the government’s six-month treasury bill yield published by FBIL or any other benchmark market interest rate published by FBIL.
While lenders can decide on the spread they charge over the benchmark to calculate the final interest rate, the spread can be changed only if the credit assessment of the borrower undergoes a substantial change. The interest rate under external benchmark has to be reset at least once in three months.
RBI had asked banks to link their lending rates on floating rate loans to retail, personal and micro, small and medium enterprise borrowers to an external benchmark from 1 October. Banks were allowed to choose between RBI’s repo rate, the government’s three-month treasury bill yield published by Financial Benchmarks India Pvt. Ltd (FBIL), the government’s six-month treasury bill yield published by FBIL or any other benchmark market interest rate published by FBIL.
While lenders can decide on the spread they charge over the benchmark to calculate the final interest rate, the spread can be changed only if the credit assessment of the borrower undergoes a substantial change. The interest rate under external benchmark has to be reset at least once in three months.
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