India's home loans, deposit rates set to decline from April 1 on revision
Indian Banks are likely to announce revised interest rates, starting April 1, which will lower the amount one earns on deposits and make home and car loans cheaper.
"There is a possibility that interest rates will be revised as the new loan pricing norms kicks in from April 1. In addition, the cut in small savings rate by government will bring down the bank deposit rate," a chief executive of a large public sector lender told The Hindu, adding that he banks' asset liability committee (ALCO) will meet this week to review rates.
A top official from another public sector bank said, lenders may wait till the monetary policy review, due on 5 April, to take a call on rates. The mar- ket expects the Reserve Bank of India (RBI) to cut interest rate by at least 25 bps. A long standing demand by the banks has finally been met by the government which lowered the interest rate of small savings scheme last Friday. The interest reduction is various schemes was anywhere between 60 and 130 bps.
Banks have been stating that due to competition from small savings scheme they were not able to reduce their deposit rate further. As a result, the cost of funds were not coming down and hence lending rates could not be lowered. "We welcome Government's decision, as SBI has been arguing for long-time that the transmission of monetary policy easing has not happened due to high small savings rates," said Soumya Kanti Ghosh, Chief Economic Adviser, SBI. The Reserve Bank of India has been prodding banks to cut lending rates in line with the reduction in policy interest rate.
While RBI has reduced repo rate by 125 bps since January 2015, which now stands at 6.75 per cent , banks' lending rate reduction was only 70 bps.
"RBI has reduced rates by 125 bps to a four-and-a-half-year low of 6.75 per cent while banks have transmitted up to 70 bps in their base rate. This is because high rates on small savings schemes make banks' fixed deposits uncompetitive and in turn do not allow banks to reduce the cost of funds," Mr. Ghosh said. The cut in small savings rate now gives more room to banks to reduce their deposit rates.
For example, the rate for one-year term deposit under the small savings scheme was reduced to 7.1 per cent from 8.4 per cent. The State Bank of India's one-year deposit rate offers 7.25 per cent (1 year to 455 days tenure). The revised small savings rates will be effective from April 1.
Clearly as banks reduce deposit rates, the cost of funds - a key component that goes into the pricing of loans - will come down.
The other reason why lending rates will come down is because banks will shift to Marginal Cost of Funds based Lending Rate (MCLR) from 1 April, as directed by RBI. This new regime of loan pricing will replace the existing regime of Base Rate. In the base rate regime, most banks considered average cost of funds while calculating the benchmark lending rate or the Base rate.