Will Lending Rates Decrease by 30 bps After Policy Rate Cut? SBI Reports
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Synopsis
In a promising turn for borrowers, SBI reports a potential drop in lending rates by 30 bps following the recent policy rate cut. This could significantly impact loans linked to the EBLR and stimulate economic demand. However, banks may face profit margin pressures. Discover the implications of this shift on the financial landscape.
Key Takeaways
- Expected decrease of 30 bps in lending rates
- Impact felt most in EBLR-linked loans
- Potential pressure on banks' profit margins
- CRR cut may improve banks' NIM
- Future monetary policy changes depend on economic performance
New Delhi, June 7 (NationPress) Lending rates are anticipated to decline by approximately 30 basis points (bps) following the recent reduction in policy rates, as stated in a new report by SBI.
This adjustment will be most noticeable in loans tied to the External Benchmark Lending Rate (EBLR), which represent around 60 percent of all loans issued by Scheduled Commercial Banks (ASCBs), as per data compiled by State Bank of India (SBI) Research.
The report highlighted that due to the significant proportion of EBLR-linked loans, the effects of the policy rate reduction will be transmitted quickly, making borrowing cheaper for many.
“This initiative aims to lower borrowing costs and stimulate demand within the economy,” the report further noted.
However, the reduction in lending rates could adversely affect banks' profit margins. To mitigate this impact, the Reserve Bank of India (RBI) has also decreased the Cash Reserve Ratio (CRR), which will help in lowering the funding costs for banks.
While the CRR reduction might not lead to immediate changes in deposit or lending rates, SBI indicated it could enhance banks' Net Interest Margins (NIM) by 3 to 5 bps.
Moreover, the report mentioned that the CRR cut could enhance liquidity within the banking system, expected to decrease base money (M0) and increase the money multiplier by 20 to 30 bps, thereby facilitating better credit flow in the economy.
Meanwhile, banks have already started reducing fixed deposit (FD) rates. Since February 2025, FD rates have fallen by 30 to 70 bps, and SBI foresees further declines in the upcoming months as this trend persists.
Looking ahead, SBI cautioned that while lower rates benefit borrowers, banks may continue to experience pressure on their profit margins.
“The precise impact will differ from institution to institution, but overall margins are likely to narrow,” the report said.
Lastly, the report indicated that any future alterations in monetary policy will hinge on economic performance.
Although there is limited capacity for additional rate cuts, a substantial profit transfer from the RBI to the government has bolstered the government's financial standing. For now, SBI anticipates no further policy rate adjustments in the next quarter.
Point of View
It is essential to recognize that while the anticipated drop in lending rates could benefit borrowers significantly, the underlying challenges for banks must not be overlooked. The balance between stimulating economic demand and ensuring the financial health of our banking institutions is critical for sustained growth.
NationPress
07/06/2025
Frequently Asked Questions
What is the expected drop in lending rates?
Lending rates are expected to decrease by approximately 30 basis points (bps) following the policy rate cut.
How will this affect borrowers?
This change will make loans cheaper for many borrowers, particularly those linked to the External Benchmark Lending Rate (EBLR).
What is the impact on banks?
While lower lending rates benefit borrowers, banks may experience pressure on their profit margins.
What has SBI indicated about future policy changes?
SBI anticipates no further policy rate changes in the next quarter, although future adjustments will depend on economic performance.
What is the Cash Reserve Ratio (CRR) and its significance?
The CRR is the percentage of a bank's total deposits that must be maintained as reserves with the RBI. A reduction in CRR can lower the cost of funds for banks.
