Home loans, deposit rates set to decline from April 1 on revision

Banks are likely to announce revised interest rates, starting April 1, which will lower the amount one earns on deposits and make home and car loans cheaper.

A long standing demand by the banks has finally been met by the government which lowered the interest rate of small savings scheme last Friday. The interest reduction is various schemes was anywhere between 60 and 130 bps.

Banks have been stating that due to competition from small savings scheme they were not able to reduce their deposit rate further. As a result, the cost of funds were not coming down and hence lending rates could not be lowered.

The Reserve Bank of India has been prodding banks to cut lending rates in line with the reduction in policy interest rate.

While RBI has reduced repo rate by 125 bps since January 2015, which now stands at 6.75 per cent , banks’ lending rate reduction was only 70 bps.

The cut in small savings rate now gives more room to banks to reduce their deposit rates.

Clearly as banks reduce deposit rates, the cost of funds — a key component that goes into the pricing of loans — will come down.

The other reason why lending rates will come down is because banks will shift to Marginal Cost of Funds based Lending Rate (MCLR) from 1 April, as directed by RBI. This new regime of loan pricing will replace the existing regime of Base Rate. In the base rate regime, most banks considered average cost of funds while calculating the benchmark lending rate or the Base rate.

A report from brokerage house, Prabhudas Lilledhar found out that the MCLR, which become the benchmark rate to all loans will be linked, will be substantially lower than base rate for most banks.

The MCLR for SBI, for example, will come to 8.26 per cent as compared to its current base rate of 9.3 per cent, the report said.

Kindly send reply or comments on this topic to [email protected]
Source:Thehindu