A day after Prime Minister Narendra Modi announced an interest subvention for home loans of up to Rs. 12 lakh and asked banks to keep the poor and middle class at the focus of their activities many PSUs and private banks reduced their benchmark lending rate by up to 1.48 percent on January 3, 2017.
- The reduction in lending rates may lead to an increase in credit taking frequency which has moderated substantially putting burden on balance sheet of banks. Housing, auto and corporate loans are all set to become cheaper.
- The three state-owned banks, State Bank of India (SBI) and Punjab National Bank (PNB) and Union Bank of India on January 1, 2017, reduced the lending rate by a good 0.9 per cent.
- While SBI reduced its marginal cost of funds based lending rate (MCLR) by 90 basis points for all maturities, Union Bank of India reduced its MCLR by 65-90 basis points for loans of various tenures while PNB cut its MCLRs by 70 basis points for 1, 2 and 3 year tenures.
- Following the reduction, lending rate of SBI for a one-year loan, has come down to 8% from 8.90%.
- Following State Bank of India, other lenders including largest private sector lender ICICI Bank and state-owned Oriental Bank of Commerce and Andhra Bank too announced cut in marginal cost of funds based lending rate (MCLR).
- Home loan rates for ICICI Bank will come down between 0.45% and 0.6%, depending on quantum and category.
- Oriental Bank of Commerce has reduced the one-year MCLR rate by 0.8% to 8.60%, while Andhra Bank has brought it down by a similar percentage point to 8.65%, effective January 3, 2017
- Kotak Mahindra Bank, too reduced the MCLR rate by up to 0.45%. The bank has reduced MCLR by 0.20% to 9% from 9.20% for one-year tenor. However, the MCLR for the three-month period has been reduced by 0.45 percentage points to 8.40%, while the lending rate for two and three years, has been brought down to 9% from 9.25%.
- Bandhan Bank has cut its MCLR by 1.48%, to 10.52%, effective from January 3, 2017. With this, the bank has cut its loan rate for small borrowers by almost 4 percentage points, since it started operations in August 2015.
- Dena bank has reduced the MCLR by 0.75%, to 8.55%, for 1 year tenor.
About Base Rate
- Base rate is the minimum rate set by the Reserve Bank of India below which banks are not allowed to lend to its customers. Base rate is decided in order to enhance transparency in the credit market and ensure that banks pass on the lower cost of fund to their customers.
- However, from April 1, 2016, Base Rate has been replaced by Marginal Cost of Funds based Lending Rate (MCLR).
Marginal Cost of Funds based Lending Rate (MCLR)
The Reserve Bank of India has brought a new methodology of setting lending rate by commercial banks under the name Marginal Cost of Funds based Lending Rate (MCLR). It has modified the existing base rate system from April 2016 onwards.
- As per the new guidelines by the RBI, banks have to prepare Marginal Cost of Funds based Lending Rate (MCLR) which will be the internal benchmark lending rates. Based upon this MCLR, interest rate for different types of customers should be fixed in accordance with their riskiness.
- The MCLR should be revised monthly by considering some new factors including the repo rate and other borrowing rates, specifically the repo rate and other borrowing rates that were not explicitly considered under the base rate system.
RBI Directs Banks to Supply 40 Percent Notes in Rural Areas
The Reserve Bank of India on January 3, 2017, directed all the banks to supply atleast 40 percent of the notes to the rural branches since currency notes in rural areas was not adequate to meet the requirements of the population.
- RBI said that Banks should advise their currency chests to step up issuance of fresh notes to rural branches of Regional Rural Banks (RRBs), District Central Cooperative Banks (DCCBs) and commercial banks, white label ATMs and post offices on priority basis which are considered main rural channels of distribution.
- RBI has also asked the banks to issue notes in denominations of Rs. 500 and below in rural areas with liberal issuance of existing stock of notes below Rs. 100.
- It also asked the bank chests to obtain supply of coins on priority basis and if required even get it issued from the central bank.