Loan rates begin to fall despite RBI status quo on policy rate

State-owned Canara Bank has taken the lead in reducing lending rates, even though the Reserve Bank of India (RBI) decided not to lower policy rates on Wednesday. The bank has cut its one-year marginal cost of fund based lending rate (MCLR) by 15 basis points to to 9.15 from 9.30. 

The country's largest bank, State Bank of India, said that while there's a case for a rate cut, it will review the rates on the first of next month."There's large liquidity, and transmission of rates depends a lot on liquidity. And as long as there is this liquidity in the system, the probability of rates coming down is very real and it will happen," said SBI chairman Arundhati Bhattacharya. SBI's lending rates are the lowest in the industry, at 8.90% for a year. 

While expressing disappointment over the RBI's decision to maintain status-quo, she said, "SBI is not dependent on market borrowing, but a rate cut would have boosted sentiments, especially after the massive demand destruction during the demonetisation drive. It is important to boost demand, and to do that, some confidence-building measures are needed. This is where a rate cut could have played a big part." 

In the first week of this month, SBI did not revise its lending rate since RBI impounded excess liquidity that was created due to scrapping of old notes. Banks had to deposit their entire mobilised deposits between September 16 and November 11 as cash reserve ratio deposit that are parked with RBI, but which do not earn any interest.

The central bank said it would release this deposit worth Rs 3.5 lakh crore back to the system on December 10. Although this will ease the liquidity scenario, it may not translate into a rate cut immediately. 

Bank of Baroda has pegged its one-year marginal cost of lending rates, the minimum rate at which it lends, at 9.05%, down 20 basis points, while Bank of India has reduced rates by 5 basis points to 9.25%. Bank of Baroda will be charging 9% for six months, 9.05% for one to three years, and 9.25% for five years. 

Source: Economic Times