It was a packed year for the banking industry. Over the past year, bank lending rates came down almost 100 basis points and term deposit rates declined by up to 75 basis points, the usually sticky savings bank deposit rate came off 50 basis points and digital transactions soared.
It is said banks need not maintain cash reserves on the quantum of new loans they offer to automobile and home buyers and also to MSMEs for the next six months. This may see the lending rates fall because State Bank Of India, Bank Of Baroda and Allahabad bank has already reduced its Marginal Cost of Fund-based Lending Rates(MCLR) by 0.05 percent.
If the loan is connected to MCLR, any decrease would rely upon the bank’s funding costs and the RBI’s policy rates. One should change to remotely benchmarked rates only if the interest rate distinction between the two is 0.50% or more. If borrowers who are currently under moratorium ultimately fail to repay, lenders stand to lose as well. While Bank of Baroda (BoB) has 90% of its eligible borrowers utilizing the moratorium, the number is 20% in the case of State Bank of India (SBI). Also, since the new loans are linked to the repo, future rate cuts may be limited, and may pinch if the Reserve Bank resumes the rate hike cycle.
What should the borrowers do?
Switching to the external benchmark-based loan regime is one the best options for the borrowers whose home loan is still connected to the base rate or benchmark prime lending rate (BPLR), as External benchmark-based home loan is more transparent in the transmission of policy rates as compared to other rate-setting mechanisms.
What should the depositors do?
After big deposit rate cuts from last year, depositors are in for more bad news this year. Many banks have cut deposit rates this year by 75-100 basis points since January. State Bank of India had cut the interest rate on its savings deposits of up to Rs 1 lakh to 3.25% from 3.5%. While RBI didn’t cut repo rate this time around, its different changes may prompt lower deposit rates. With saving account rates at the base, additional money can be moved to less than one-year fixed deposits to earn over 6% rates.
With the Budget, hiking deposit insurance to Rs 5 lakh one can earn higher interest without losing sleep over the safety of deposits.
