The largest lender in the nation, State Bank of India (SBI), raised the marginal cost of funds-based lending rates (MCLR) last week. SBI stated that these rates have not yet peaked and may climb by an additional 10 to 15 basis points (bps).
Corporate loans are correlated with the MCLR, which is based on a bank's funding costs. The external benchmark lending rate (EBLR), which is largely correlated with the policy repo rate of the Reserve Bank of India, is used to determine retail loan rates.
The RBI Governor Shaktikanta Das urged banks to review their business models in light of the ongoing discrepancy between the growth rates of deposits and credit, which prompted the decision to raise the MCLR. Since February 2023, the central bank has maintained the repo rate at 6.5%.
State Bank of India
Under the condition of anonymity, a key SBI official told a credible source that deposit rate transmission is mostly finished and that any modifications would probably be maturity bucket-specific for asset-liability management. The senior SBI official stated, "There was scope for tweaking the lending side where MCLR is the benchmark, for about 10-15 basis points."
The cycle of rising deposit rates may have peaked and run its course, but the lending side will still be affected in the months to come. In order to fulfill the demand for loans, banks were forced to give depositors higher rates due to tight liquidity conditionsAn increase in funding costs would have an impact on the MCLR calculation, which sets the benchmark for lending rates to small and medium-sized businesses.
Dinesh Khara, the chairman of SBI, said last week that deposit rates have peaked.
As of March 2024, 36-37% of the credit in SBI's loan book was related to MCLR. According to data from the Reserve Bank of India, MCLR-based credit accounted for 39.4% of total credit for all scheduled commercial banks.
The weighted average domestic term deposit rates on fresh and existing deposits increased by 259 basis points and 185 basis points, respectively, in reaction to the 250 basis point adjustment in the policy repo rate since May 2022, according to the RBI's State of Economy report (May 2024).
The increase in the cost of money that occurs with a lag is reflected in the growth in MCLR. Between May 2022 and April 2024, there was a 166 bps rise in the one-year median MCLR.
According to a different SBI executive, there is still an opportunity to stabilize net interest margins by raising lending rates by ten to fifteen basis points. Because of the fierce competition, there is very little opportunity for rate adjustments in the retail sector, which includes house loans. Positive and growing attitude characterizes the sector and services. In addition, the pace of capital investment is creating opportunities. Units and businesses can choose to pay more for loans, according to the CEO.
The potential increase in MCLR should be seen within the context of ongoing upward pressure on the cost of funds brought on by the re-pricing of deposits, according to Karan Gupta, head and director of financial institutions at India Ratings.
Additionally, Gupta stated that when the Reserve Bank of India lowers the policy repo rate later in the fiscal year, it will have an effect on bank profits. A lot of consumer loans are correlated with external benchmarks such as the policy repo rate. He said that the lenders must notify the borrower of changes in policy rates right away, which might have an instantaneous effect on margins.
