State-owned SBI, which is also one of the country’s largest lenders, increased its MCLR by 10 basis points for the first time in three years since 2019, while lenders including Bank of Baroda, Axis Bank and Kotak Bank gained 5 basis points. rise in benchmark lending rates.
This could mean that the regime of soft credit rates that borrowers have been enjoying since 2019 is about to end and that many other banks are expected to follow suit.
“This is just a precursor to a scenario of higher lending rates,” said ICICI securities research analysts Kunal Shah, Renish Bhuva and Chintan Shah.
Introduced as an alternative to the base rate system, the marginal cost of funds (MCLR) lending rate was launched as a benchmark set by banks not to lend below this rate. The MCLR is different for different durations ranging from overnight to three years.
SBI is revising its MCLR ranging from 6.75 to 7.40% as of April 15, while Axis Bank’s MCLR, which ranges from 7.20 to 7.55%, is effective from April 18. Kotak Bank’s MCLR ranges from 6.65 to 7.90% and went into effect on April 16. , and Bank of Baroda offers an MCLR of 6.50-7.35% from April 12.
According to research analysts at ICICI Securities, the rate of transmission of the MCLR rate hike will be more effective as the proportion of the banking sector’s variable rate loans tied to external benchmarks (EBRs) increases further.
According to ICICI Securities, in February 2022, lending rates (outstanding loans) were the lowest for the home loan segment at 7.5%, reflecting competitive pressure and faster repricing (through transfers of balance). Personal loans, meaning loans other than home, vehicle and education loans, are mostly unsecured. In terms of new lending, over the past few quarters, the large industry segment shows the lowest lending rates (
“Spreads charged by domestic banks on the policy repo rate moderated during S2FY22 for EBR-linked loans. In February 2022, repo spreads were lowest for personal loans and at housing in the case of PSU banks and for housing and MSME loans for private banks,” the trio said.
They further explained that the reduction in lending rates was seen across most sectors in FY22, adding to the slowdown seen in FY21. The decline was greatest for agricultural, infrastructure, large industry and personal loans in the case of new INR loans and for infrastructure, personal loans, vehicles and MSMEs, in the case of ongoing INR loans.
These analysts noted that the pass-through was smooth at the short end of the interest rate maturity spectrum, while the pass-through to bank loan and deposit rates had until recently been relatively slow.
About 50% of the transmission of a change from the repo rate to the deposit rate occurred in 12 months and 17 months longer for the transmission to lending rates, the analysts added.
Further, they stated that “if banks’ cost of funds response to changes in policy rates was lagged and incomplete, there was a wedge in the pricing of bank credit, which delayed transmission.”
Looking ahead, ICICI Securities analysts said: “We believe that with the increase in benchmark (repo) rates in FY23, the pace of transmission will be more efficient as the proportion of the banking sector variable rate loans linked to external references (EBR) increases more than 39.2% / 28.6% / 9.3% in December 21 / March 21 / March 20. The proportion of loans linked to the MCLR is fell to 53% in Dec 21 from 77.7% in FY20, and just 5% of floating rate loans are linked to the base rate.”
According to analysts, among the product segments, 46% / 69% / 20.4% of retail credit / MSME / large industries, respectively, are linked to the EBR and will be revalued as the rate of repo will be modified. For Large Industrials, Vehicles and Personal/Preventive/Gold Lending, 71%/60%/61% are still tied to MCLR and these segments would see benefits with the recent announcement of banks revising MCLR.
In addition, analysts said that the transmission through higher repo rates will be relatively more favorable for private banks compared to PSU banks, as a proportion of EBR-linked loans for the former reached 57% in December. 21 (vs 43% / 17.5% Mar 21 / Mar 20) while for PSU banks it was 28% Dec 21 (vs 20.3% / 4.8% Mar 21 / Mar 20) .
More than 60% of floating rate loans from PSU banks are still tied to the MCLR, analysts pointed out.