State Bank Of India

State Bank of India will scrap the annual interest rate reset clause on all loans and move to uniform base rate-linked payments to smoothen out the fluctuations in its profitability. Most term loans have one-year reset clause, which it thinks is cumbersome both for the company as well as for the bank. So, from now on, it will give term loans which will be linked to its base rate, the floor rate below which it won’t lend to anyone.

Banks’ profitability gets squeezed whenever there is a movement in interest rates as borrowers are charged with a lag effect, while deposit rates rise immediately. Most term loans have a one-year reset clause where the borrower’s rate rises, or falls, at a pre-specified date even if the benchmark rates change. This leads to banks losing out when deposit rates rise and benefits when deposits fall. The net interest margin, a measure of profitability fluctuates because of this reset clause. 

The State Bank of India will give all loans linked to its base rate, now at 9.25%. The benefits of the move could not be quantified. Corporates looking at long-tenure loan often bargain for a term loan where interest rate is fixed for at least one year. In the past, SBI burnt its fingers after the central bank raised interest rates since it had committed to give borrowers a fixed rate loan at lower rates. Also, the country’s largest lender has decided not to compromise on margins to retain clients. Even for retail home loans, SBI has decided not to charge its customers for prepayment of loan, even if the customer is switching over to another bank. crackcrack