New year gift: Banks cut home loan rates

India’s largest lender State Bank of India has slashed marginal cost of funds-based lending rate (MCLR) across all tenors to the lowest in about a decade, forcing rivals to follow suit in the fight for market share, a day after Prime Minister Narendra Modi’s new year speech. In his speech, the PM had urged lenders to broaden their focus to the vast range of poorly served borrowers from the poor, lower-middle and the middle classes.

The series of rate reduction is amongst the highest in one shot since the rate cuts that followed post 2008 financial crisis. In the past, banks have typically lowered lending rates by increments of 5 to 10 basis points as they brought their interest rates in line with RBI's monetary policy or if the cost of funds dropped. 

From borrower’s point of view, it is a new year gift from the government and banks as the rate cut will reduce their home loan liability and new home buying aspirants will start looking for homes in future. After the demonetisation drive, customers went through pain but at last the pain may seem to be bearing fruits. Banks have already entered interest rate reduction cycle.

As for the impact on banks, the topline of the banks will surge as demand for home loans and auto loans is likely to get a boost in the near term. This potential demand will be reflected in the next couple of quarters. The reduction in the MCLR is expected to positively impact loan growth, both in the retail consumer segment and in corporate sector lending, thereby supporting growth impulses in the economy.