State Bank of India Adjusts Loan Rates Based on New Methodology

  • SBI now ties borrowing charges to its marginal cost of funds
  • Central bank pushes change to reflect policy shifts faster

State Bank of India, the country’s largest lender, announced loan rates based on marginal cost of funds as the nation’s central bank pushes for faster pass-through of cuts in its borrowing benchmark.

The Mumbai-based bank set charges for seven maturities, varying from 8.95 percent for overnight lending to 9.35 percent for three years, a statement posted Monday on its website showed. All Indian banks must announce new loan rates that will take effect April 1.

The Reserve Bank of India introduced marginal cost of funds-based lending rates to ensure benchmark policy-transmission and improve transparency in the way in which banks calculate charges on borrowings. Prime Minister Narendra Modi’s administration is betting on cheaper loans to spur investment by boosting credit growth.

Under the new system, lenders will have to publish changes in rates for different maturities and review them each month after accounting for market shifts. Banks currently use average costing to determine their base rates. This method of calculation has allowed the nation’s largest lenders including State Bank of India to reduce their base rates by about 70 basis points or less, which is lower than the RBI’s 1.25 percentage-point cut in its benchmark. SBI’s base rate stands at 9.3 percent.

“We are not expecting pressure on banks’ lending margins as they can charge a spread" over the marginal cost of funds lending rate, Hatim Broachwala, a Mumbai-based banking analyst at Nirmal Bang Institutional Equities, said by phone. Quicker pass-through of benchmark policy changes through the new methodology "may not happen immediately,” he said.

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