The reduction in base rate by 30 basis points which is tied to debt for most long term retail borrowers including home loan and student loan is said to benefit as many as 8 million borrowers of the country's largest lender. This has been brought about to ensure that key policy rates are passed on to consumers as lowered lending rate.
Base rate is the rate below which the lending institution cannot lend except for cases where the loans are being extend to bank's own employees or loan if offered against deposits as collateral. Changes have to be effected in the base rate at least once in a quarter and with the recent base rate reduction to the lowest in the industry at 8.65% by SBI, other private and public sector banks are likely to follow.
The bank has also revised its benchmark prime lending rate to 13.40%, lower by 30 basis points. One basis point is one-hundredth of a percentage point. And it is to be noted that since last many years the BPLR rate has been taken over by the base rate and the former is primarily offered to creditworthy customers.
This is another term that you should acquaint yourself with before seeking loans as this is the latest replacement to base rate which was made in April 2016 and referred as marginal cost of funds based lending rate. The rate below which banks are not allowed to lend except for a few cases as specified by the RBI.
The re-set option with the MCLR rate which fixes the loan to the MCLR rate for a year with change thereon is a better option as it aims to bring in the transmission of benchmark rates such as repo rate on a more real time and actual level.
How base rate reduction by SBI will benefit loan borrowers?
It is to be made note of that a reduction in base rate would not immediately translate into lower home loan rates but definitely mean benefits for an existing borrower in the future course.
Also, the MCLR rates which stand unchanged at 7.7% for overnight, 7.95%, 8.05% and 8.1% for one, two and three years. The customers after paying for the switching over charges of close to 0.58% of the loan amount are better off when they migrate to MCLR as they can then reduce their EMI or tenure due to lower interest rate regime