Bank of India targets 35% share in MCLR-linked credit in next 2-3 years

Prudent growth forecast for FY26: 12-13%

With the interest rate cut cycle around the corner, Bank of India (BoI) is tweaking its lending strategy to enhance the share of the marginal cost of funds-based lending rate (MCLR)-linked loans from about 29 per cent now to 35 per cent in the next two to three years.

 

Rajneesh Karnatak, managing director and chief executive of BoI, told Business Standard that earnings from external benchmark-linked rate (EBLR) loans to retail and micro, small and medium enterprises (MSMEs) will be impacted and may also dent net interest margins (NIM) when the policy repo rate is cut.

 

For the Mumbai-based lender, EBLR-linked loans had a 48.34 per cent share in advances at the end of December 2024, up from 47.73 per cent a year ago. The share of MCLR-linked loans was about 32.9 per cent at the end of December 2023. Its NIM stood at 2.8 per cent in December 2024, compared to 2.85 per cent a year ago.

 

For the banking sector, the share of MCLR-linked loans fell from 62.3 per cent in March 2021 to 45.4 per cent in March 2023 and further to 39.2 per cent in March 2024. The share of EBLR-linked loans grew from 29.5 per cent in March 2021 to 49.6 per cent in March 2023 and rose further to 56.6 per cent in March 2024, according to the Reserve Bank of India’s monetary policy report (September 2024).

 

While there is competition for non-MSME loans, the public sector lender will gradually nudge corporates to shift some of their term loans to MCLR as a benchmark for pricing. Many corporate loans are linked to the repo rate. This change is not expected to happen overnight, and the share of MCLR in the total loan book will grow over the next two to three years, Karnatak said.

 

The bank continues to maintain its aim to enhance the share of retail, agriculture and MSME (RAM) to 60 per cent of total advances in the medium term, up from the current 57 per cent. The balance of the loan book constitutes corporate loans.

 

Turning to the outlook for the next financial year (2025-26/FY26), Karnatak said the pace of business growth — credit and deposits — will moderate to 12-13 per cent after elevated growth in the year ending March 2025 (2024-25). The moderation reflects prudence and the changing business and economic environment. Credit has expanded by 15.3 per cent year-on-year (Y-o-Y) and deposits by 12.29 per cent Y-o-Y at the end of December 2024.

 

India Ratings & Research, in its outlook for the country’s banking system (January 2025), said deposit growth could be 12-13 per cent in FY26, with high competitive intensity for garnering low-cost current account savings account deposits. Credit could expand by 13-13.5 per cent in FY26, but the mix is likely to change with a continued slowdown in lending to non-banking financial companies and the retail sector.