India’s largest lender, the State Bank of India (SBI), on Sunday carried out a steep cut of 90 basis points for lending across all maturities, with other banks expected to follow. This comes a day after Prime Minister Narendra Modi asked banks to prioritize lending towards poor and lower middle class citizens.
SBI reduced its so-called marginal cost of funds based lending rate (MCLR) to 8% from 8.90% for maturities ranging from overnight to three-year tenures.
Indian banks had moved to MCLR as their new benchmark lending rate from June 2016. It replaced the base rate system for new borrowers. It is calculated on the marginal cost of borrowing and return on net worth for banks. MCLR rates for all tenures are revised every month.
The MCLR system was introduced by India’s Reserve Bank to ensure fair interest rates to borrowers as well as banks.
Flush with funds due to the recent demonetization, SBI has also reduced interest rates for other tenures, including one month, three months and six months, by 90 basis points.
Last week, SBI’s subsidiary State Bank of Travancore announced a reduction in its lending rate and another public lender IDBI cuts its rate by up to 60 basis points.
Banks have received an estimated 14.9 trillion rupees ($219.30 billion) in old 500, and 1,000 rupees notes from depositors since the government on Nov. 8 unexpectedly banned the banknotes in a bid to fight counterfeiting and bring unaccounted cash to the economy.
That had raised expectations banks would have room to cut lending rates, which is seen as vital to increase credit growth and spark a revival in private investments.