SBI loans to get cheaper; Bank cuts external benchmark-based rate by 25 bps

The country's largest lender, State Bank of India, on Monday announced a reduction in its external benchmark-based rate (EBR) by 25 basis points to 7.80 per cent from 8.05 per cent. The new rates will be applicable from January 1, 2020.

The reduction was announced a few weeks after the Reserve Bank of India (RBI) maintained the status quo on key policy rates. The central bank has adopted the repo rate to be the external benchmark rate. And the repo rate is the interest rate at which the RBI lends funds to the banks.

With this reduction, the interest rate for existing home loan customers as well as micro, small and medium enterprises (MSME) borrowers, who have availed loans linked to external benchmark based rate, would come down by 25 basis points. With this reduction, new homebuyers will get loans at an interest rate starting from 7.90 per cent per annum instead of the existing 8.15 per cent. SBI charges a spread of 265 bps over the RBI's repo rate (currently at 5.15%) to calculate its external benchmark-based lending rate. It also charges a premium of 10 basis points to 75 basis points for pricing the effective interest on the home loan for the customer.

Banks are required to reset the external benchmark based rate at least once in three months

SBI, earlier this month had announced a cut in the one-year marginal cost of funds-based lending rate (MCLR) rate by 10 bps. These rates were effective from December 10, 2019. With this cut, SBI's one-year MCLR stood at 7.90 per cent per annum from 8 per cent per annum. This was the eighth consecutive cut in MCLR by SBI in this fiscal.

So far, RBI has cut the repo rate by 135bps this year. (100 basis points/bps = 1 percentage point)