Short-term loans set to get cheaper as banks shift to new lending rates

New Delhi: In what comes as good news for borrowers, short-term loans are set to become cheaper as several banks are slated to shift to new lending rates effective from Friday.

The banks will fix interest rates on the basis of a calculation called marginal cost of funds. In effect this means that short term loans could attract interests below the base rate of the bank.

At the State Bank of India (SBI), the rate for loans up to one-year will be lower than current base rate of 9.30%. The new interest rates vary from 8.95 per cent for overnight to 9.35 per cent for three years, SBI said in a document posted on its website on Thursday.

Banks will also add a credit risk premium, fixing final rates based on the quality of the borrower.

Both HDFC Bank and BoB matched SBI's lending rate of 9.20 per cent for one year and 9.3 per cent for a two-year loan. The rate of interest will be 9.35 per cent for a loan of three years duration.

BoB fixed interest rate of 9.65 per cent for 5-year loan. The bank has also decided to levy a strategic premium of 0.35 per cent over and above the marginal cost of funds based lending rate (MCLR) as above, BoB said in a statement.

PNB has pegged interest rate of 9.40 per cent for one year, 9.55 per cent for 3 years and 9.70 per cent for 5 years. Subsidiaries of SBI, SBBJ and State Bank of Travancore also announced lending rates.

According to India Ratings and Research (Ind-Ra) the implementation of Marginal Cost of Funds-based lending rate (MCLR) has the potential to channelise the recent surge of volumes in the commercial paper market towards bank credit.

Ind-Ra expects the shortest tenor MCLR for bigger banks to be around 90-100 basis points lower than the base rate, while making it comparable to commercial paper rates with similar tenor.

On the longer end (one year rate) considering the 70-75 basis points of tenor premium evident in the market, the difference from the base rate can be around 25-30 basis points.

The MCLR is expected to address the RBI's primary objective, of expediting monetary policy transmission along with augmenting uniformity and transparency in the calculation methodology of lending rates, it said.

(With PTI Inputs)