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Bank should extend the benefit of lower interest rates beyond the retail sector, indicating that investors should cut the cost of loans for companies. Banks had benefited from RBI’s reduction in policy rates as well as the inflow of low-cost deposits in current and savings accounts in November and December. The average lending rate reduction (by banks) has been less.

As sustained by RBI, as well as the government, banks have pocketed the gains of the rate reduction and only in late December after a prod by the Centre the banks pared their benchmark rate by up to 90 basis points. But the reduction for home loans was lower and for other categories even lower.

The main focus of the bankers as they believed that lower rates could encourage demand was more on the retail segment, unlike the corporate sector which is besieged by a combination of excess production capacity and a high level of debt.

Lending rate cut by SBI (state bank of india) is good news for borrowers, mainly customers with long term home loans of 20-25 years. Banks don’t change the EMI amount when rates change, but changes of the loan to align with new rate. A20 year loan shorter by almost three years, but loans which are nearing their end may not be affected. 90 basis points rate cut has reduced the tenure of a 25-year home loan by almost five years.

However, many loans taken before April 2016 continue to be linked to the base rate, shifting to new MCLR (Marginal cost of funds lending rate). Borrowers will pay a conversion fees for moving to MCLR, but this cost would be recovered in no time due to lower EMI. Those loans should actively consider this in New Year with long term. But when interest rates are growing, a slower revision in the lending rate protects the customer from the rate hike.
Some banks rearrange their rates every quarter, but others banks could wait for up to a year to make change. This works both ways for borrowers. . In a falling rate regime, it is better to go with a lender who resets the rate very often (every quarter or so).

Before SBI announced the cut, IDBI Bank had cut lending rates. Now, other banks will have no choice but to follow suit. If your home loan provider does not cut rates as expected, switch to a bank with a lower rate. You will have to do the paperwork (applying for a new loan and foreclosing the existing one) but the savings in EMI will be enormous. A customer with a Rs50 lakh loan for 25 years will save more than Rs3,000 every month if his EMI is lowered from 9.15% to 8.25%.