Rolling out one of the steepest cuts in borrowing rates in recent times, leading banks lowered their lending rates on Sunday i.e. 1st January by up to 90 basis points, or a little less than one per cent, a day after Prime Minister Narendra Modi suggested that they should focus on the poor, lower middle class, middle class and senior citizens, and act in “public interest”.
After the deadline for the demonetisation of Rs 500 and Rs 1,000 notes ended Friday, State Bank of India (SBI), the country’s largest bank, reduced the overnight marginal cost of funds based lending rates (MCLR) to 7.75 per cent from 8.65 per cent. The new rates are 8 per cent against 8.90 per cent for one-year loans, 8.10 per cent for two-year loans and 8.15 per cent for three-year maturity, SBI said.
The new loan rates will be effective from January 1. Women home-loan borrowers of SBI will be able to avail loans at interest rates of 8.20 per cent while others can avail of home loans at 8.25 per cent. On November 2, SBI had cut home loan rates to 9.1 per cent — the lowest in six years — as part of a festive scheme.
Delhi-based Punjab National Bank cut the overnight lending rate by 70 basis points to 8.20 per cent while Union Bank of India slashed the rates by 65-90 bps for different tenures. IDBI Bank’s three-year loans will now be at 9.30 per cent, down by 40 basis points. However, borrowers may not get the full benefit of the MCLR cut due to the spread that banks charge on loans.
The steep cut has been facilitated by the surge in deposits during the demonetisation period, which led to a substantial fall in cost of funds for lenders. Banks have mobilised an estimated Rs 14.9 lakh crore of deposits following demonetisation during the last 50 days. The interest rate cut is expected to boost sentiment, and spending, too, all of which have been hit because of demonetisation. Other banks are expected to follow suit in the coming days.
Deposit rates are also expected to slide further. The RBI has cut the policy rate — the repo rate — by 175 bps since the start of 2015 but banks were slow in passing on the benefits to customers.
Prime Minister Modi had on Saturday advised banks to “keep the poor, the lower middle class, and the middle class at the focus of their activities” and act with the “public interest” in mind.
On Sunday, BJP president Amit Shah welcomed the cuts in a series of tweets posted on his official account.
“Declining interest rates will prove to be a boon for the poor, neo middle class and middle class while providing a boost to our economy. After demonetisation, banks are flush with funds & reducing lending rates up to 1%, which will make housing, vehicle & enterprise loans cheaper,” Shah posted. “It is vision of PM @narendramodi, which is rooted in concern for the poor and under privileged, that such a move has been possible,” he wrote.
SBI chairman Arundhati Bhattacharya said, “Initiatives aimed at benefiting the lower income segments of the country is indeed a welcome move by the government. It is fairly evident that the government is serious about comprehensive inclusion. Low cost housing should witness growth in the medium to long term. The government’s commitment to a less cash society will also aid in reforming the tax structure for the better.”
However, bankers don’t expect the deposits collected during the 50-day window to remain in the system.
In an interview earlier with The Indian Express, Bhattacharya had said: “All these deposits will not stay back. Most of it will be drawn back. Our own reckoning is that only 10-15 per cent will probably stay. We’re still a cash intense economy. Though we’re trying hard to modernise and become digital, it will take time. Ultimately, it’s a cultural phenomenon and it’s also a question of good infrastructure.”
With lending rates coming down, bankers expect credit offtake to pick up. The growth in non-food bank credit in November 2016 was down at 4.8 pc is as compared with an increase of 8.8 per cent in November 2015.
The Reserve Bank had revised downward the growth for 2016-17 to 7.1 per cent from 7.6 per cent, with evenly balanced risks, due to demonetisation. In the December monetary policy review, all six MPC members acknowledged that the impact of demonetisation on the economy is still uncertain, but they expect the impact to be transitory and hence not necessitating a monetary policy response, which could affect the medium-term inflation outlook.