Why SBI's 40 Basis Point Cut In Base Rate May Bring Little Cheer to Home Buyers

Following the Reserve Bank of India (RBI)'s policy rate cut, public sector lender State Bank of India (SBI) decided to cut its base rate by 40 basis points (from 9.7 per cent to 9.3 per cent) on September 29. This propelled many to expect a fall in home loan interest rates.

Earlier, when SBI's base rate was 9.70 per cent, home loan interest rates were 9.70 per cent for women home buyers, and 9.75 per cent for others. However, after the recent reduction, home loan interest rates are 9.50 per cent for women home buyers, and 9.55 per cent for others. In short, new borrowers will see only a 20 basis point reduction in rates.

A look at why despite a cut in the base rate, interest rates have not seen a fall accordingly.

Getting the basics right

The difference between the home loan interest rate and the base rate is the “spread”. While base rate is the minimum rate below which banks are not permitted to lend, spread is the difference between what a bank earns on loans against what it pays as deposit interests.

Now, even though SBI cut the base rate by 40 basis points, its spread has gone up from five basis points to 25 basis points. To put it shortly , the spread rose by 20 basis points. Even without changing the base rate, banks and mortgage lenders can change home loan interest rates by changing the spread.

Now, borrowers who take a home loan of Rs 1 crore and above from SBI will be expected to pay the same interest rates they paid before the base rate reduction. Bank officials justify the stance, saying that base rates of other banks are as high as 9.55 per cent. In December 2013, when the base rate of other banks was 10.3 per cent, the base rate of SBI was 10 per cent.

The new rates would be applicable to home loans from October 5 onwards.

Even though the RBI expects banks to charge the same interest rates to existing and new borrowers with a similar risk profile, SBI's spread will remain five per cent for existing home loan borrowers. So, existing borrowers will see their home loan interest rate declining to 9.35 per cent. The interest rate for existing women home loan borrowers will be 9.30 per cent.