With banks being asked by the government to prioritize their lending towards the poor and middle class, they have moved to MCLR as their new benchmark lending rate from June, which replaced the base rate system for new borrowers.
Several major banks suffered a temporary setback following demonetization, owing to majority of banking staff & resources being deployed to deal the cash crunch. However, improvement in funds flow after demonetization has resulted in a major capital influx for public and private sector banks. This has set off a trend of low interest rates on consumer loans.
A one-year benchmark is used for consumer loans like home, auto, personal loans, etc. A margin is then added above the MCLR to decide the cost of retail loans. India’s leading public sector bank - State Bank of India has cut lending rate by 0.9 percent, Union Bank of India followed suit whereas PNB has slashed the lending rate by 0.7%.
State Bank of Hyderabad and Kotak Mahindra bank have cut their Marginal Cost based Lending Rates (MCLR), while Dena Bank slashed lending rate by 0.75 percent.It is calculated on the marginal cost of borrowing and return on net worth for banks. It was introduced by RBI to ensure fair interest rates to borrowers as well as banks. State Bank of Hyderabad also cut its MCLR by 0.10 percent, while Kotak Mahindra Bank cut its MCLR based loan rates by 0.20 to 0.45 percent.
What this has done is that it has helped banks set the lowest benchmark rate for SBI in six years. In the nut shell, SBI will have the lowest lending rates since 2011. In fact, SBI in total has cut its benchmark lending rate by 200 basis points since January 2015. If you have been contemplating getting a loan for personal expenses or buy a house or a car, now is perhaps the best time in nearly 6 years!