MCLR hike may not be sufficient for banks; SBI stock rises 1.1%

Credit growth, ability to pass on further increase in cost of funds are key: Experts

The stock of State Bank of India (SBI) was up 1.1 per cent intra-day due to the 20 basis points hike in marginal cost of funds-based lending rate (MCLR) from September 1. 

The hike, which was decided upon due to rising cost of funds and the hardening of policy rates, was not limited to India’s largest bank. 

Other banks such as ICICI Bank and Axis Bank, too, increased their MCLR. 

Though the rise in MCLR should add to the topline and profitability of banks, there are couple of factors that would impact this, say experts.

The new MCLR will, according to P K Gupta, managing director of SBI, mainly be applicable to new loans (incremental credit), besides review of existing loans. 

Review periodicity is typically one year. Thus, it will meaningfully add to interest income only when credit growth momentum is there. Since the beginning of FY19, commercial banks’ year-on-year credit growth was at 12-13 per cent, which needs to be sustained.

“The credit growth could remain in double-digits (12-13 per cent) in the near term, as bad loan levels have peaked out, economy is improving slightly, and exports have also improved,” according to G Chokkalingam, managing director at Equinomics Research & Advisory. 

This will probably be driven by retail credit growth, given that corporate credit is yet to pick up meaningfully, said experts. 

Second, the cost of funds will rise further. The Reserve Bank of India is expected to undertake further rate hikes amid macroeconomic headwinds such as a weak rupee, which fell a further 21 paise against the dollar on Monday, and rising crude oil prices, among others.
 

While banks are expected to pass on the rising cost of funds with further upward revision of MCLR, the gains will depend on how quickly they transmit the same and the extent of increase, given the stiff competition. 

The other factors that will impact the financials are slippages (accounts turning bad), and recoveries from existing bad loans.