SBI home loan borrowers cheer

With the recent cut in CRR, more banks are expected to follow suit. Expect loan rates to come down.

One bank has finally blinked to Reserve Bank of India’s (RBI) push to reduce rates. State Bank of India (SBI), the country’s largest lender, has lowered its base rate by 25 basis points (bps) to 9.75% per annum. One bps is one-hundredth of a percentage point. The move comes immediately after cash reserve ratio (CRR) was cut by 25 bps. According to a SBI official who did not want to be named as he is not authorized to speak to the media, the cut will have a major impact on loans that are linked to base rate. Also 70% of our advances are linked to base rate. This is the first time that SBI has ever cut its base rate since the concept came into existence in 2010.

What is base rate?

Base rate is the minimum rate at which a bank can lend to its customers. In other words, the bank can’t lend below the base rate. Banks alter the base rate whenever their cost of funds and other parameters alter, depending on change in key rates. RBI introduced the base rate system in July 2010. Prior to this, banks used to lend money on the benchmark prime lending rate (BPLR).

What it means for SBI customers?

Both existing and new SBI customers will benefit from the move. Currently, SBI’s home loan is priced at base rate plus 25 bps. Earlier, the SBI home loans of up to Rs.30 lakh was at 10.25%. With the base rate cut, the home loan rate will come down to 10% (base rate 9.75% plus 25 bps). So if you take a loan of Rs.30 lakh for a 20-year tenor at an interest rate of 10.25%, you would have to pay Rs.40.68 lakh as interest, whereas on 10% interest rate, you would pay Rs.39.48 lakh interest. With a 25 bps cut, you save Rs.1.20 lakh.

Says Adhil Shetty, CEO,, "This is a positive development for both new as well as existing borrowers as the costs will come down by 25 bps automatically."

Those still on BPLR will not gain anything from this. To get a better deal you will have to switch to base rate. Says R.K. Bansal, executive director, IDBI Bank Ltd, "A cut in base rate depends on a bank’s liquidity situation, credit offtake and cost of funds. There will be pressure on other banks to cut rate. Some banks may follow suit." So all home loan borrowers may look forward to lower equated monthly instalments.