SBI tinkers with spread, passes on lower benefit to new home loan borrowers

Borrowers have been rejoicing at various banks announcing 30-35 basis points cut in their base rates (minimum lending rate), after the RBI slashed its key policy rate by 50 basis points last week.

But home loan borrowers may not see the full benefit of such cuts being passed on to their rates, if the latest move by SBI is any indication. The bank announced a 40 basis point reduction in base rate last week.

But it has lowered its home loan rates by just 20 basis points, from 9.75 per cent to 9.55. These rates will be applicable to new borrowers effective October 5.

Changes in base rates ideally impact existing borrowers who have opted for floating rate loans. These loans are reset at a higher or lower rate based on an increase or decrease in base rates. However, loan rates may not necessarily change by the same amount as base rates. Why?

Banks usually decide their interest on loans with a mark up on the base rate.

These are called spreads – the excess lending rate charged over base rate. Hence, by tinkering with the spreads, banks can change loan rates, irrespective of the changes in the base rate.

In the case of SBI, it has increased its spread on home loans from 5 basis points earlier to 25 basis points now.

Hence, earlier at a base rate of 9.7 per cent, the bank charged interest rate of 9.75 per cent on home loans. Now, at 9.3 per cent base rate, it offers home loans at 9.55 per cent.

The 20 basis points reduction in home loan rates, according to bank officials, applies only to new borrowers. Existing borrowers will, in fact, see their loan rates decline by 40 basis points – as the spread of 5 basis points will remain unchanged. Old borrowers thus will enjoy a lower loan rate of 9.35 per cent.

In January, the RBI had asked banks to spell out the rationale for charging differential spreads to borrowers and charge the same spread to all borrowers with a similar risk profile. This was to ensure that when banks tweak base rates, all borrowers — new and old — are charged the same rates.

But with the SBI’s latest move, it appears that new borrowers will be charged higher rates than existing borrowers.