25% SBI home loan customers are still paying higher interest rates; are you among them?

Call it ignorance or sheer laziness, many home loan customers of the State Bank of India are still paying higher interest rates on home loans even as better options are available. A quarter of SBI’s home loan customers in terms of the total home loan portfolio of Rs 3.72 lakh crore has clung to the old ‘base rate’ regime that charges higher interest rate.

The trend of customers voluntarily (or ignorantly) paying a higher interest rate won’t be any different in other banks as the largest bank in the country represents one fifth of the banking industry in terms of total assets.

SBI charges an average interest rate of around 9.40  per cent on ‘base rate’ home loans. SBI’s almost Rs 1 lakh crore home loan portfolio is locked in the old base rate regime. The base rate is much higher than the average rate of 8.85 per cent that the SBI charges under the marginal cost of lending rate (MCLR) regime. MCLR regime replaced the base rate as it was an improved one. The home loan portfolio under the MCLR is around Rs 2.70 lakh crore.

The RBI has now directed banks to move from MCLR to repo-linked rate regime, as the MCLR didn’t correctly reflect the transmission of rates in a declining interest rate scenario.

That is not all. Surprisingly, the SBI still has a home loan portfolio of close to Rs 5,000 crore under the old prime lending rate (PLR) regime, which existed a decade ago. PLR customers are happily paying 11.02 per cent interest rate on their home loans. All these customers of base rate, PLR and MCLR can easily switch to new rates at lower interest rates. But, the experience of base rate shows the MCLR customers may not react quickly to take advantage of the new and improved repo-linked interest rates.

These are some of interesting facts if one analyses the SBI’s home loan portfolio divided among three broad interest rate buckets. The repo-linked interest rate is the new vertical that has just begun from October onwards.

The outstanding home loan portfolio of SBI is currently at Rs 3.72 lakh crore for the first quarter (April-June) of 2019-20.

A higher proportion of customers remaining in the old interest rate structure is good for banks. It provides a cushion to play around by charging higher spreads.  The banks continue to charge slightly higher rates despite interest rates coming down over the last one year. Similarly, there is not much transparency in the way banks fix cost of funds, risk premium and margins.

The new repo-linked interest rate is much better as it offers a clear industry standard of repo rate plus other costs. A customer can easily compare rates across different banks by comparing the spreads over and above the repo rate.

In fact, some banks are charging extra from not so good customers. Three public sector banks recently specified a higher risk premium of 5 to 10 basis points for a borrower with credit score below 700. A score more than 800 is considered very good, 700 -800 is acceptable and anything below 700 is somewhat risky.

The base rate regime existed between July 2010 and April 2016.  The base rate was calculated based on average cost of funds, operating costs, negative carry of cash reserve ratio and profit margins. The base rate was a bit rigid as it considered the average cost of funds.  The RBI later came out with an improved MCLR , which took the marginal cost of fund rate to decide on the interest rates. It didn’t work.

While many suggest that repo-linked regime may impact banks’ margins as transmission will be faster, but it may take some time as the large portfolio of home loans still have customers from the previous regime. These customers appear reluctant to switch.