Loans become more expensive as banks increase MCLR: SBI increases MCLR by 10 basis points; BoB, the Axis follow suit

Consumers and businesses will pay a higher interest rate on loans as the State Bank of India (SBI) raises the marginal cost of funds-based lending rates (MCLR) by 10 basis points (bps) on l all mandates. This is the first example of a lending rate hike by SBI in more than three years. The interest rate cycle appears to have turned around with other major lenders including Bank of Baroda (BoB) and Axis Bank also increasing the MCLR by 5 basis points each across all mandates.

The one-year MCLR at SBI now stands at 7.1%, down slightly from 7.25% at HDFC Bank, Punjab National Bank (PNB) and ICICI Bank. BoB’s one-year MCLR is now 7.35%, while Axis Bank’s is 7.4%.

Since October 2019, retail loans – including home loans – are priced according to a lending rate linked to an external benchmark (EBLR). However, variable rate loans taken out by consumers before October 2019 will now become more expensive.

MCLRs now only apply to new business loans. Although declining, the share of MCLR-linked loans remains the largest, 53.1% in December 2021, on banks’ books, according to RBI data. For SBI, the share of loans linked to the MCLR is estimated at just over 40%. The proportion of floating rate loans linked to external benchmarks rose to 39.2% in December 2021 from 28.6% in March 2021. Bankers said the cost of funds has been rising since the start of 2022 , because they had raised deposit rates. “The MCLR is a calculated rate and banks cannot increase it arbitrarily. You see the increases now because there has been a real increase in the cost of funds, a senior executive at a mid-sized private bank told FE.

Additionally, the RBI’s tougher stance on inflation gives lenders the confidence to raise lending rates in anticipation of repo rate hikes. SBI’s Dinesh Khara was among the bankers who had expressed concern over what was seen as a poor risk assessment. Interestingly, some large companies reportedly secured loans from bankers at interest rates below the yield on the benchmark bond, which closed at 7.152% on Monday.

Recent data from RBI shows that while loan growth recovery is underway, it is still quite weak. Although there is some traction in lending with a 100 crore note size, most of the growth is coming from small note sizes. Signs of capex are still not visible as the private sector shows negligible growth in sanctions. Interestingly, the recovery in credit growth is stronger in private banks.

Sanjay Agarwal, senior director of CARE Ratings, said interest rates had now bottomed out. “The difference between lending rates and deposit rates has increased significantly over the past two years. Now that this difference can narrow, both rates will increase,” he said.

Banks must have an MCLR calculation policy based on the RBI’s framework for MCLR-based pricing and the policy can only be changed once every three years. Lenders who revise MCLRs may do so to account for different levels of adjustments they have made to deposit rates in different time frames, the bankers said.

In a recent report, SBI’s Economic Research Department said the recent spike in benchmark yields lays bare the growing disconnect between benchmark yields and lending rates, with banks entering territory where lending rates are effectively below yields and offer little incentive to opt for risky loans.

“Furthermore, as benchmark rates begin to rise, the effective yield could increase further, discouraging the decay of business demand for the proposed capital expenditures. As banks would be forced to increase lending rates, bringing them in line with the market-determined course (with NBFCs following suit with a mark-up), the effects on the economy can be destabilizing,” said SBI Group chief economic adviser Soumya Kanti Ghosh, in the report. .

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