On Monday, the State Bank of India (SBI) announced a 25 basis points (bps) cut in its external benchmark rate (EBR) for the first time after the Reserve Bank of India's monetary policy review in early December.
According to the public sector lender's press release, the revised EBR will be reduced to 7.80 percent per annum from 8.05 percent and the revision will come into effect from 1 January 2020.
For new home buyers loans will be available at an interest rate starting from 7.9 percent a year from 8.15 percent.
In 2019, SBI has cut its MCLR (Marginal Cost of Funds based Lending Rate) on loans by 65 bps.
With effect from 1 October 2019, retail loan products like home loan, personal loan, etc offered by public sector banks were to be linked to any one of the 4 external benchmarks specified by RBI. SBI's EBR is linked to RBI's repo rate, which is currently at 5.15 percent. This EBR is fixed at repo rate plus 265 basis points.
Banks are required to reset their EBR once every three months depending on the movement in the underlying external benchmark.
Note that banks add a risk premium of 10 to 75 bps on the effective rates before sanctioning loans to customers based on their profiles.