MCLR being used by banks to woo corporates

Bankers say they are able to play on risk premium and offer differential pricing to customers under MCLR

The Marginal Cost of Funds-based Lending Rate (MCLR), the new benchmark to which the pricing of bank loans are linked, is now being used by lenders to attract higher rated corporate clients by offering differential pricing.

“When we were in the (earlier) base rate regime, we had to offer everyone almost the same rate, with very little play. In MCLR, I can work on the spread and offer lower rates to less risky customers. There are different buckets and I can place the risk as per that. It can be a big help in growing the corporate segment, where all banks are essentially chasing top-rated companies,” said a private sector banker.

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The head of corporate banking with a State Bank of India associate said the band of MCLR rates had given flexibility to offer better on short-term requirements for a new corporate customer.

“The borrower might need money for one year. Instead of giving a loan for one year, which has a higher MCLR, the bank gives the MCLR for a three-month loan, which is 10-15 basis points cheaper. This loan could be rolled over for four quarters. This is being done within Reserve Bank norms and meeting the credit-quality norms,” he added.

MCLR rates had been introduced by the Reserve Bank of India last year and came into effect from April 1. The central bank had directed banks to move to this system to ensure faster monetary transmission; banks, it noted, were not passing on the central bank’s rate cuts. It is also expected to improve bank credit by channelising the recent surge of volumes in the commercial paper (CP) market. CP dues as a percentage of short-term bank credit went up to 14 per cent in FY16, from 11 per cent last year. Three to five percentage points of this, Rs 74,500 crore to Rs 1,20,000 crore, is likely to flow back into the banking system as rates get competitive.

Banks are fine-tuning the internal rating framework that will give support to pricing decisions. There is discretion of 10-15 basis points to the credit committee to decide, without sacrificing prudential norms.