SBI raises benchmark rate for older loans by 10bp

Mumbai: The State Bank of India (SBI) raised its base rate (BR) – a benchmark used for some of its floating rate loans – by 10 basis points (100 bps = 1 percentage point). This decision is taken as a signal that the cost of funds will gradually begin to increase. Following the December 21 review, the bank’s revised BR stands at 7.55%. The change will affect a small portion of borrowers whose loans are still tied (since before 2016) to the BR.
SBI also revised its prime rate (PLR) to 12.3% from 12.2%. This will impact an even smaller number of borrowers with very long term loans as PLR was used as a benchmark before BR until 2010.
Most retail borrowers today have their loans tied to the repo rate. These rates will only increase when the RBI increases the rate at which it lends to banks. Most economists don’t see this happening in the current fiscal year.
Many bankers claim that current lending rates are as good as it gets for borrowers as the central bank has started cutting liquidity in money markets. This has already started to put upward pressure on government bond yields.
BR was introduced as a benchmark in 2010 to replace the PLR, which the RBI felt was not transparent enough because banks were offering loans to preferred businesses at the sub-PLR. One of the rules for using BR as a benchmark was that loans should have a positive spread. In other words, no loan could be advanced below the RB. However, the BR was replaced by the Marginal Cost of Lending (MCLR) rate in 2016 because it was believed that banks cut rates only for new borrowers when interest rates fell. The MCLR was then replaced by the external benchmark lending rate in 2019.
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