Public sector banks volunteer to link their lending rates to repo

Several public-sector banks on Friday volunteered to link their lending rates to the repo rate to facilitate quicker transmission, even as some reduced their marginal cost-based lending rate (MCLR) over the past two days.

The cuts follow State Bank of India’s (SBI’s) reduction in the lending rate by 15 basis points (bps) after the Reserve Bank of India’s (RBI’s) repo rate cut by 35 bps, on Wednesday. 

This in effect is an external benchmarking of the lending rates, which even the RBI has kept on hold for now, considering banks’ profitability concerns.

The RBI is expected to cut its repo rate by another 40 bps in this fiscal year, which will make rates for housing and vehicle loans cheaper for Union Bank customers by a similar magnitude.

RBI Governor Shaktikanta Das is prodding public-sector and private-sector banks to reduce their lending rates. In response to the RBI’s cumulative policy rate cut of 75 basis points till August 6, banks on average lowered their lending rates by only 29 basis points. 

While banks lowered their marginal cost-based lending rate (MCLR), Bengaluru-headquartered Canara Bank, Mumbai-based Union Bank, and Hyderabad-based Andhra Bank also said they would soon be linking their loan products and possibly deposit rates to the repo rate instead of the MCLR “in order to provide better transmission of interest rates”.

Analysts said this would possibly squeeze the banks’ profit margins because lending rates could not be lowered immediately. 

However, banks are unlikely to shift their lending portfolio to such a mechanism and will probably just keep it limited to niche retail loans, which anyway see a fast transmission, analysts said.

Allahabad Bank Managing Director and Chief Executive Officer S S Mallikarjuna Rao said the bank would consider developing products of both assets and liabilities linked to the external benchmark to transmit the benefits of rate cuts to customers shortly.

Andhra Bank said it would soon introduce repo rate-linked deposits and loans, even as it cut its MCLR by 25 basis points on Friday. 

Union Bank said it would link its vehicle and housing loans to the repo rate, while cutting the MCLR by 15 bps, bringing it down by 30 bps since February.  Bank of India cut its MCLR by 25 bps, while Bank of Maharashtra and IDBI Bank had lowered their rates by 10-15 bps on Thursday.

Indian Overseas Bank cut its MCLR by 15 bps for tenures of one year and above, and by 10 basis points for the tenure of less than one year.

Kolkata-based UCO Bank cut its MCLR by 15 bps across all tenors, while Allahabad Bank reduced its MCLR by 15 to 20 bps. 

Allahabad Bank said it would also cut its term deposit rates by 10 bps across all buckets in more than a year.