SBI reduces external benchmark rate by 25 bps; loans to get cheaper

A few weeks after the Reserve Bank of India (RBI) maintained status quo on key policy rates, the country's largest lender, State Bank of India (SBI), early Monday morning announced a 25 basis points cut in its external benchmark rate. (100 basis points/bps = 1 percentage point). SBI becomes the first bank to cut its external benchmark rate after the RBI's monetary policy review in December.

According to SBI's press release, the revised effective benchmark lending rate (EBR) of 7.8 percent (down from 8.05 percent) will come into effect from January 1, 2020. New home buyers will get loans at an interest rate starting from 7.9 percent a year(previously at 8.15 percent). Do keep in mind that as per RBI's circular, banks can add a risk premium to EBR before dispersing loans to customers.

So, far this year, SBI has cut one-year MCLR on loans by 65 bps.


What is external benchmarking?
From October 1, 2019, any personal, housing or auto loan etc. taken by you from a bank will be linked to any one of the 4 external benchmarks specified by the Reserve Bank of India (RBI). According to the circular issued by the central bank dated September 4, 2019, banks can benchmark the interest charged on the loans that they offer to any one of the following: (a) RBI's repo rate, (b) Government of India three-months Treasury Bill yield published by the Financial Benchmarks India Private Ltd. (FBIL), (c) Government of India six-months Treasury Bill yield published by the FBIL and (d) Any other benchmark market interest rate published by the FBIL.

Most banks have linked their loan rates to the repo rate. Some like Citi Bank have linked loan rates to three-month treasury bill yield.

RBI has mandated banks to switch to the new rate regime so that the benefits of its monetary policy actions are passed on in a swift and transparent manner. So far this year, the RBI has cut repo rate by 135 bps, while banks have passed on just 44 bps with regards to new loans.