State Bank of India has reduced its Marginal Cost of Funds based Lending Rate (MCLR) by 10 points effective from September 10. SBI has also lowered its fixed deposit by 20-25 basis points. This is the fifth consecutive reduction in MCLR by the country’s biggest lender. This one-year SBI MCLR will be 8.15 per cent per annum. Other banks are likely to follow SBI’s lead and could lower their MCLR rates too.

SBI claims to have around 35 per cent and 36 per cent of market share in home loans and auto loans respectively. SBI said the action was to realign its interest rates on term deposits “in view of the falling interest rate scenario”.

SBI will have a one-year reset clause on floating rate home loans that are typically linked to its one-year MCLR. If you are an existing home loan customer of SBI, the latest cut of 10 basis points in MCLR may not lower your home loans interest rate or EMIs immediately.

The RBI recently directed all banks to link all new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans to Micro and Small Enterprises from October 01, 2019 to external benchmarks, saying banks had not satisfactorily passed on the benefit of recent policy rate cuts to consumers.

Since early February, RBI has reduced its benchmark repo rate by 110 basis points for better transmission of rate cuts. Under the new mechanism, the RBI said banks are free to decide the spread over the external benchmark. Under this new loan regime, borrowers will get the immediate benefit of RBI’s rate cuts but when the rate cycle turns, they will be hit by rising interest rates faster than the MCLR-based loans.

(With input from agencies)