SBI announces shift to lending rate based on marginal cost of funds

State Bank of India (SBI), the country's largest lender, on Wednesday that it would be shifting to a marginal cost of funds based lending rates (MCLR) from 1 April as directed by the Reserve Bank of India (RBI).

RBI had, on 17 December, released the final guidelines on computing interest rates on advances based on the marginal cost of funds. The guidelines come into effect from 1 April 2016.

As per the new mechanism, SBI said its MCLR would range from 8.95 per cent to 9.35 per cent for loans of different tenors, ranging from overnight to three years.

The overnight lending rate would be 8.95 per cent. For advances from one month the new cost of funds-based rate has been fixed at:

  • One month : 9.05 per cent
  • Three-months :  9.10 per cent
  • Six months : 9.15 per cent
  • One year : 9.20 per cent
  • Two years : 9.30 per cent
  • Three years : 9.35 per cent

In December last year, the RBI had laid out guidelines for banks to move towards the MCLR, starting 1 April 2016. The move was aimed at making transmission of monetary policy quicker and more effective, as banks price their lending rates after taking into account bond/money market rates that may have moved following an interest rate decision.

Banks have so far been following separate methodologies for calculating their base rates, such as weighted average cost etc. This had made banks' response to RBI rate changes slow and tardy. Sometimes, RBI rate changes had little effect on banks' lending rates.

It may be noted that despite a 125 basis point reduction in RFI's repo rate, banks have barely effected an average 50 bps reduction in their lending rate.

Banks have maintained that monetary policy transmission has been weak as a bulk of their borrowing has traditionally been through deposits rather through the market, which slows down the speed of reduction in cost of funds, in the face of a rate cut. But on an average, analysts say a move to MCLR is expected to reduce lending rates by about 10-15 basis point.

Apart from helping improve the transmission of policy rates into the lending rates of banks, the measure is expected to improve transparency in the methodology followed by banks for determining interest rates on advances. The guidelines are also expected to ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks. Further, marginal cost pricing of loans will help the banks become more competitive and enhance their long run value and contribution to economic growth.