Real transmission of rates remains low as banks play on spread

The Reserve Bank of India had introduced the MCLR rates which became effective from April 1st to ensure that the rate of transmission becomes faster

Marginal cost of funds-based lending rate (MCLR), the new benchmark to which the pricing of the loans are linked, is supposed to ensure faster transmission. While the pace of transmission has improved, the real gain by a customer still remains low.

“Spreads have expanded now, so the lending rates haven’t meaningfully come down as yet. Even if the MCLR is 50-60 basis points (bps) lower than the base rates, customers have seen a reduction in rates by only 20-30 bps,” says the chief financial officer of a private sector bank.

Another banker also agrees, saying it will take some more time before the full effect can be seen. “At present, not more than 10 per cent of the customers are on the MCLR rate. Since it is being offered on all the new loans, the bank might want to adopt a cautious view and price the risk element. As a result, the spread might be higher and so the real benefit will not be in the same quantum.”

The MCLR rates, introduced by Reserve Bank of India, became effective on April 1. The move came at a time when the central bank had reduced the key lending rates by 125 bps, but banks brought down their base rates by only 50-60 bps. The new MCLR regime is based on marginal cost of funding instead of the average cost of funds to ensure rate cuts are passed quickly.

However, some customers might benefit more than others as the spread can be lowered, depending on the risk profile. This is especially true for clients in the corporate segment, say bankers. This is because unlike a base rate, where they had to lend at a fixed rate, MCLR allows lenders to work on the risk premium and offer differential pricing to customers. In the corporate segment, where credit offtake is muted, banks would want to woo the customers by offering them lucrative rates.

However, bankers do acknowledge that the transmission is better than it was during the base rate regime but if the full benefits are not being passed on to the customer then the advantage does get limited.