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MUMBAI -- The year-end has brought good news for borrowers with Union Bank of India moving ahead of Reserve Bank of India to bring down its base rate - albeit very marginally. The state-owned lender is the first bank to reduce lending rates after Reserve Bank of India began its tightening cycle in early 2010.

Union Bank of India said that its asset liability committee, in its quarterly review of interest rates, has decided to bring down base rate by 10 basis points (100 bps =1%) from 10.75% to 10.65% with immediate effect. Interestingly, several PSU banks have their base rate at 10.75% while SBI's benchmark is at around 10%.

A senior banker said that ever since RBI introduced the new benchmark of base rate, which is calculated based on a formula which takes into account cost of funds, revision of lending rates has become less subjective. This is a big positive for home loan borrowers who in the past saw their floating rates rise with market rates but declines were not entirely passed on. Also, since no bank is allowed to lend below the base rate, a bank cannot bring down borrowing costs only for new customers beyond a point without reducing their base rate.

Although the trend in base rates could be identical across banks, changes in cost of funds could vary. "Typically, most bank deposits are of one to two-year maturity and changes in deposit rates impact overall cost of funds over a period of time. A bank could see its cost of funds fall if it has some high-cost deposits maturing and it chooses not to renew them because of ebbing demand for loans," he added.

"In the past when rate hikes were not passed on, RBI in its monetary policy has made it clear that it wants the rate signals that it sends to be transmitted to borrowers. So far, RBI has not signalled any easing of rates and we are not sure whether it wants lending rates to come down," said the head of a public sector bank.

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Publication:Pakistan & Gulf Economist
Date:Jan 8, 2012
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