MCLR effect: Upto 160 basis points may fall in loan rates

Making monetary transmission faster, the new regime for pricing loans from April one is expected to reduce lending rates by 80-160 basis points.

It would also lead to small negative impact on net interest margins.

According to broking firm Prabhudas Lilladher's Research note the marginal cost based pricing of loans rates (MCLR) would be much lower than existing base rates.

For example, for State Bank of India, likely MCLR would be 8.26 per cent as against base rate of 9.3 per cent, for Axis Bank it would be 8.26 per cent as against 9.5 per cent being current base rate. Two public sector lenders - Bank of India and Bank of Baroda - could see their lending rates dipping to 8.15 per cent and 8.08 per cent, respectively, it said.

Banks will have the flexibility to tinker with the tenor premium which would likely offset any NIM compression.

Rating agency ICRA said the new norms hold the potential to improve the efficiency of monetary policy transmission for new borrowings.

The benefit (in a declining interest rate scenario) or the dent (in the rising interest rate scenario) would be restricted to new borrowers immediately. For existing borrowers (with floating rate liabilities) effect would be with a lag of upto one year.

Rating agency CRISIL said regime allows banks to charge a differential rate for shorter-tenure loans and enables them to compete with the capital market for corporate borrowings.

There are some downsides of the MCLR framework.

ICRA said it expected the banks' short tenure MCLR to be lower than the base rates. This in turn will allow the banks to compete with money market / capital market instruments such as commercial paper (CP), bonds etc. It may arrest the increase in CP outstanding which has grown at 19 per cent CAGR over last three years as against 12 per cent growth in banking credit.

The norms are cumbersome as they require banks to manage several MCLR rates, leading to rise in operational and technology expenses, said a public sector bank executive.

Prabhudas Lilladher in a note said refinancing activity would pick up sharply as borrowers look to borrow at shorter end where in the MCLR rate is lower due to lower tenure premium.

Asset liability management will become a big challenge as the propensity of borrowers to move will now be much higher given higher rate differential between different tenure. Banks who are not well matched will face high earnings volatility.