Benchmark rate will be 8 per cent as against 8.9 per cent

State Bank of India (SBI), the country’s largest lender, has reduced its marginal cost of funds based lending rate (MCLR) by a whopping 90 basis points. Among the steepest interest rate cuts in a long time, the move is aimed at boosting loan growth, which has fallen to a multi-decade low.

MCLR is the benchmark rate to which all loans are linked. A percentage point equals 100 basis points (bps).

According to a statement issued by the SBI, its one-year MCLR would be 8 per cent as compared with 8.9 per cent earlier. Home and auto loans of most banks, including SBI, are linked to their respective one-year MCLRs.

The rate cut will be applicable to all fresh loans. The effective interest rate for new home loans is likely to be between 8.25 per cent and 8.5 per cent. Existing loans linked to the MCLR will be impacted when they are re-priced. MCLR has been in effect from April 1 and had replaced the base rate.

“The decision is prompted by liquidity,” SBI chairman Arundhati Bhattacharya told The Hindu. “We have a lot of deposits in low-cost accounts. Credit growth is very muted. It is important for us to try and jump-start the credit growth,” she said.

Asked if all the loans that are linked to MCLR will be impacted, Ms. Bhattacharya said, “It will impact all the new loans… and the old loans as and when they are renewed and re-priced.”

The bank has also reduced its base rate by 5 bps to 9.25 per cent.

This is the second rate cut by the SBI in two months, as the lender had reduced MCLR by 15 bps in November. Following the withdrawal of the old ₹500 and ₹1,000 notes, banks’ loan growth has slumped, with economic activity taking a hit.

According to Reserve Bank of India (RBI) data, loan growth, on a year-on-year basis, dropped to 5.8 per cent as on December 9 from 7.9 per cent on November 11. The withdrawal of notes came into effect from November 9. Deposits, on the other hand, grew from 11.7 per cent to 15.9 per cent in the same period.

Another public sector lender Union Bank of India has also reduced its MCLR with the one-year rate coming down by 65 bps to 8.65 per cent. The IDBI Bank on Friday had announced reduction in its two-year MCLR by 40 bps to 9.2 per cent, and the 1-year MCLR was reduced by 15 bps to 9.15 per cent. All the banks have made the new MCLR effective January 1.

Prime Minister Narendra Modi on Saturday, appealed to banks to keep the poor, the lower middle-class, and the middle-class the focus of their activities.