It’s advantage new borrowers

After holding rates for two consecutive policies, the RBI’s 25-basis-point cut in its key policy rate on Tuesday has no doubt cheered markets. The move, the first by the recently constituted Monetary Policy Committee (MPC), has also paved the way for banks to lower their benchmark lending rates in the coming months.

But while loan rates have been moving lower since the April policy — when the RBI last cut its policy rate — it has only benefited new borrowers. Rates on loans priced against the erstwhile benchmark base rate have more or less stayed pat, offering little respite to existing borrowers.

From the beginning of January 2015 (when the rate easing began) until now, banks’ weighted average lending rates (on outstanding loans) have fallen by 60-70 basis points, according to data put out by the RBI. On fresh loans, the fall in lending rates has been higher at 100 basis points. These cuts, nonetheless, fall short of the 150-basis-point reduction in repo rate since the January 2015 policy.

To tackle this very issue of transmission, the RBI introduced the marginal cost of funds-based lending rate (MCLR) framework, which to some extent has forced banks to lower their benchmark MCLR since the April policy. On an average, banks have lowered their MCLR by 10-15 basis points since April.

While on the face of it this appears to be good news, in reality, existing borrowers have not had much respite. This is because existing borrowers (for loans taken before April 1 this year) continue to be charged interest on loans based on the earlier base rate system. Base rates since April has remained unchanged for most of the banks and hence, existing borrowers have not seen any relief in lending rates after the MCLR was implemented in April.

IOB, Canara Bank, Indian Bank, Andhra Bank, SBI, Central Bank of India — all have kept their base rates unchanged since April; many have not tweaked them in the last one year. Existing borrowers have been handed the short end of the stick, having to pay higher rates than new borrowers.

In the case of SBI, for instance, old borrowers continue to pay interest at the rate of 9.55 per cent, based on the erstwhile base rate (9.3 per cent). New borrowers (post-October) have to pay a lower 9.3 per cent (one-year MCLR at 9.05 per cent). In some banks, the disparity in base rate and the MCLR are far wider.

Old borrowers though have the option of moving to the MCLR-based loan rates.

Even for borrowers who have taken loans after April 1, lending rates have fallen only marginally when compared to the steep cuts in deposit rates by banks. For instance, while Canara Bank has cut deposit rates for certain deposits by 50 basis points, it has lowered its one-year MCLR by just 10 basis points since April.

Indian Bank, Andhra Bank and others have also seen sharper cuts in deposit rates than MCLR. Transmission, it appears, remains an issue in the new MCLR framework.

Even if one had taken a loan under the new MCLR framework, reduction in MCLR month-on-month has not benefited all borrowers. Unlike under the base rate system, where a revision in base rate was immediately reflected in the lending rates of all loans benchmarked against it, under the MCLR-based pricing, lending rates are reset only at specific intervals, corresponding to the tenure of the MCLR.

In the case of SBI’s home loans, for instance, since the loans are benchmarked against the one-year MCLR, lending rates will only be reset once a year. In October, when the bank had cut the MCLR by 5 basis points, the reduced rate of 9.05 per cent was only for new home loan borrowers with effect from October 2016. Hence, while the RBI’s rate cut will trigger further cuts in the benchmark MCLR in the coming months, it may not bring cheer to all borrowers alike.

Depositors on the other hand have seen rates fall by 25-50 bps across banks and tenure since the April policy. Public sector banks that still command a lion’s share of the deposits continue to face margin pressures on account of weak credit growth and rising bad loans. Most of these banks may continue to cut rates on deposits in a bid to lower their cost of funds and keep margins intact.

With the RBI cutting its key policy rate, it may be time to lock into those higher deposit rates. Banks may be tardy in passing on rate cuts to borrowers, but they sure seem quick to cut deposit rates.