After the Reserve Bank of India’s (RBI) press conference on 16 March, many market participants think that there could be a rate cut when the monetary policy committee (MPC) meets in the first week of April to mitigate the effect of Covid-19, also known as novel coronavirus, on the Indian markets and economy. RBI governor Shaktikanta Das said that the central bank will do all it takes to ensure that the effect of Covid-19 is mitigated, and financial markets and institutions in India continue to function normally.
Economists said that the indication is that MPC will not only look at inflation this time but also at the impact of the coronavirus on the Indian economy and financial markets. “I would expect RBI to be cutting rates. There’s a lot of pressure to do so. We have seen so many central banks doing it,” said Madan Sabnavis, chief economist at CARE Rating. According to Sabnavis, the rate cut may not help in invigorating growth but it would be like a “palliative”. “If businesses shut down, they would need to pay their debts. Rate cuts can help in bringing down the debt servicing cost,” he said.
If RBI indeed does so, borrowers whose loans are linked to the repo rate are expected to benefit. Effective 1 October 2019, all new borrowers have their loans rates linked to an external benchmark, which is the repo rate for most banks.
Since RBI didn’t cut rates in its February policy, borrowers on repo-linked loans have not seen any reduction in rates for some time now. Experts said this was because repo-linked loan rates were already at the lowest and saw little scope for further reduction. “Most banks have priced their home loans aggressively. State Bank of India (SBI) has the lowest rate at 7.95%. It means the bank is charging 280 bps over the repo rate, which is at 5.15%. Interest rates from many other public sector banks are close to SBI’s rates,” said Gaurav Gupta, co-founder and CEO, MyLoanCare.in, an online loan marketplace. This may change now if RBI cuts repo rates.
It may be noted that the recent reductions in the marginal cost of funds-based lending rate (MCLR) by SBI and several other banks only benefit borrowers whose loans are not linked to an external benchmark. On 11 March, SBI cut MCLR by 10-15 basis points (bps). One bps is one-hundredth of a percentage point.
Though most banks refrained from reducing rates for repo-linked loans, Bank of Baroda (BoB) was an exception. To bring down rates for new customers, BoB lowered the mark-up it charges on the external benchmark. For home loans, the bank was charging a spread of 300 bps above the repo rate, which is 5.15% at present. The lowest interest rate on a home loan was, therefore, 8.15%. It has brought down the spread by 15 bps, which is now at 285 bps. New home loan rates start at 8% from 1 March.
BoB was able to lower the mark-up on the repo rate as its cost of funds came down. “Based on the December data, we reviewed our cost of funds. As it was lower, we passed the benefit to the borrowers. We do this review every quarter,” said Virendra Kumar Sethi, head, mortgages and other retail assets, BoB.
Gupta said some bank were lowering their rates to match the lowest rate in the home loan segment. “BoB is matching its lowest rate to that of SBI, which has the most competitive rate in the industry. BoB is still not a significant player compared to SBI in the home loan segment. The latter, therefore, won’t face any pressure after the rate cut,” said Gupta.
The repo-linked home loan rates for Bank of India, Canara Bank and Central Bank of India are 8%, 8.05% and 8%, respectively, according to the banks’ websites. Currently, Punjab National Bank and SBI offer the lowest rates of 7.95%. The rates may vary according to the borrowers’s risk profile and the loan amount.
Along with BoB, HDFC, too, revised its retail prime lending rate by 5 bps. The lender’s retail prime lending rate is at 16.55%, according to its website. Note that housing finance companies are not mandated to link their loans to an external benchmark. The lowest home loan rate for HDFC is now at 8%, according to its website.
“As rates are already aggressive, we see that lenders are giving discounts on processing fees to lure customers. At least until the next repo rate revision, we don’t believe there would be any revision of rates from lenders whose loans are already aggressively priced,” said Aditya Mishra, founder and CEO, Switchme.in, a platform that helps borrowers shift their home loans to other financial institutions.
The case for MCLR
In its February policy, RBI didn’t change the repo rates but introduced a new policy tool called long-term repo operations (LTRO) under which banks could receive cheaper long-term funds. LTRO helps inject liquidity into the banking system. It also announced the relaxation of cash reserve ratio (CRR) requirements for home and auto loans and loans to micro, small and medium enterprises. The two moves were expected to lower the cost of funds for banks, which they were expected to pass on to borrowers.
For MCLR to change, the cost of deposit needs to fall, which is what happened in the case of most banks. In the case of SBI, last week’s cut was the 10th reduction in the current financial year. SBI usually sets the trend for interest rates in most loan segments, including home loan.
All eyes are now on the RBI’s next monetary policy.