Sharp Lending Rate Cut Won’t Be Rolled Back, Says SBI Chief

The 90-basis-point reduction in the benchmark marginal cost of funds lending rate (MCLR) to 8 percent by State Bank of India (SBI) will not be reversed in a hurry, said the bank’s Chairman Arundhati Bhattacharya at a press conference today.

The rate cut, the sharpest in years, is on account of a surge in deposits after the government’s demonetisation announcement and is also a bid to kickstart flagging credit growth, Bhattacharya said.

The bank’s current account and savings account (CASA) deposits have surged by nearly 5 percentage points to 47.55 percent of all deposits over the 50-day window for depositing the demonetised Rs 500 and Rs 1,000 notes.

In contrast, SBI’s loan growth has fallen to around 7 percent after the withdrawal of Rs 500 and Rs 1000 notes, from the 11-12 percent levels seen earlier in the year.

The reduction in the lending rate has been done on the assumption that around 40 percent of the cash that has been deposited with the bank as part of the demonetisation process will remain, Bhattacharya said.

The bank hopes that the sharp reduction in the rates will jump-start lending, especially in the normally high-growth mortgage space. It anticipates that the reduction will be enough to boost credit growth to 8-9 percent for the year.

The rate of credit growth will determine the extent of the impact on the bank’s net interest margin. At the current rate of growth, there is likely to be a margin contraction of around 7-8 basis points, said Bhattacharya.

Also Read: State Bank Of India’s Steep Rate Cut Prompts Other Lenders To Follow

Home Loans To Be The Growth Driver

Home loans, one of the fastest growing retail loan segments, are being positioned as the main driver of credit growth for the remainder of the financial year by SBI.

Earlier today, the bank reduced its home loan rate for women to 8.6 percent for loans up to Rs 75 lakh. For men, this rate now stands at 8.65 percent.

In early November, the bank had reduced its interest rate on the same home loans by 15 basis points to 9.10 percent for women and 9.15 percent for men.

The reduction in the home loan rate, therefore, is 50 basis points since November, 40 basis points lower than the reduction in the benchmark MCLR. The reason is a higher interest rate spread on the home loans–60-65 basis points now as opposed to the earlier 20-25 basis points.

Bhattacharya said the decision to increase the interest rate spread on these loans was part of “business strategy”.

Return Of Teaser Loans?

The bank has also launched a special home loan product that is similar to the “teaser loans” it had earlier toyed with. Bhattacharya, however, insists that this product is not a “teaser loan”.

As part of the scheme, customers will be offered a fixed interest rate, pegged to the current MCLR, for a period of two years. Subsequently, these loans will be pegged to the prevailing MCLR after two years. This feature will be offered on home loans up to Rs 30 lakh, the bank said in a statement.

Home loans are currently growing at a faster rate than the rest of the bank’s retail portfolio at around 16 percent, Bhattacharya said.

Also Read: Lower Lending Rates To Cushion Note Ban, Expect 50-75 Basis Point Cut: BofA Merrill Lynch

Few Customers Will Benefit Initially

Borrowers, whose loans are still pegged to the base rate, will not benefit from the sharp cut in lending rates. According to Bhattacharya, only 15 percent of the retail loans on SBI’s books are pegged to the MCLR. For corporate loans, the number is higher, at 40 percent.

Customers, however, have the option to switch.

“We have been encouraging customers to switch to the MCLR. Now, with the new rates, perhaps it will be a more attractive proposition,” said Bhattacharya.

In order to shift to the prevailing MCLR from the base rate, SBI customers have to pay a minimum of Rs 10,000 and a maximum of 0.5 percent of the outstanding loan amount.

Financial planners say switching to the lower rate would be beneficial for borrowers that are in the early stages of their repayment cycle.

So far, a few other banks have cut their benchmark lending rates.

Union Bank of India reduced its one-year benchmark MCLR to 8.65 percent from 9.30 percent. Punjab National Bank, another public sector lender, cut its MCLR by 70 bps. The bank’s one-year MCLR now stands at 8.45 percent. Dena Bank and IDBI Bank, too have announced a cut in rates.

Among private lenders, ICICI Bank has cut rates by 70 basis points with its one-year MCLR now at 8.20 percent. Kotak Mahindra Bank has cut its one-year MCLR by 20 basis points to 9 percent.

HDFC Ltd will review its rates in the first week of January. The cost has come down over the last few months, Keki Mistry, vice-chairman, HDFC Ltd., told BloombergQuint over the phone.

Merger With Associates To Be Delayed

Separately, Bhattacharya said that the merger of SBI with its five associates and Bhartiya Mahila Bank is likely to be delayed by a quarter. The reason, she said, was not demonetisation but the fact that the scheme of the merger had not yet been notified by the government.

Earlier, the bank had planned to complete the process by the end of the financial year.

The bank has been aligning itself with its associates over the past two quarters. This has involved recognition of non performing assets and an increase in the amount of provisioning.

The merger, the bank’s management had said earlier, is expected to yield several cost benefits including an improvement in the group’s treasury performance, and lower cost of funds.