India’s largest bank reduces its MCLR

India’s largest bank State Bank of India (SBI) reduced its marginal cost of funds-based lending rate (MCLR) by 35 basis points or bps (One bps is one-hundredth of a percentage point) across all tenors with one-year MCLR, effective April 10. This is the eleventh consecutive cut in MCLR in FY 2019-20. 

• The marginal cost of funds-based lending rate (MCLR) is the minimum interest rate that a bank can lend at. 
• MCLR is a tenor-linked internal benchmark, which means the rate is determined internally by the bank depending on the period left for the repayment of a loan
• The RBI introduced the MCLR methodology for fixing interest rates from 1 April 2016.
  
  

  Other important rates Base rate: Base Rate is the lending rate calculated based on the total cost of funds of the banks and is the minimum interest rate at which a bank can lend except for loans to its own employees, its retired employees and against bank’s own deposits. PLR: PLR (Prime Lending Rate) is the internal benchmark rate used for setting up the interest rate on floating rate loans sanctioned by Non Banking Financial Companies (NBFC) and Housing Finance Companies (HFC). PLR rate is calculated based on average cost of funds. NBFC and HFC generally price their loan at discount on their existing PLR.

  
  
  

  Highlights: 

  • The one-year MCLRcomes down to 7.40% per annum from 7.75% per with effect from April 10, 2020.
  • EMIs on eligible home loan accounts (linked to MCLR) will get cheaper by around ?24.00 per 1 lakh on a 30 year loan.
  • The country's largest lender also announced to realign its interest rates on savings bank deposits, with effect from 15 April 2020.
  • The bank reduced the savings deposit rates by 25 bps from 3% to 2.75% for balances upto ?1 lakh and 25 bps from 3% to 2.75% for balances above ?1 lakh.
  • The move will benefit borrowers from SBI having MCLR-linked floating rate loans, like home loans.

   

  How does it affect the economy? 

  • For every economy, the banking system is its lifeblood and any negative or positive changes in the sector directly impacts the economy.
  • The MCLR system aims to improve the faith of the individual borrowers and business in the banking sector.
  • By improving transparency in how lending rates are calculated, it encourages more individuals and entrepreneurs to rely on the country’s banking system for their credit needs.
  • Moreover, the MCLR, by enhancing the faster and effective transmission of policy rates, helps the country’s financial regulatory body to take more effective monetary policy measures.
  • It also ensures that interest rate cuts by the RBI directly reduce Equated Monthly Instalments (EMIs) on Home Loans, small Personal Loans, Business Loans, etc. Additionally, it will help borrowers to get fast loans or instant loans from banks.