State Bank of India indicates another 10-15 basis points MCLR hike

Loans to companies are linked to the MCLR, which depends on the cost of the funds of a bank. Retail loans are linked to the external benchmark lending rate (EBLR)

State Bank of India (SBI), the country’s largest lender that recently raised its marginal cost of funds-based lending rates (MCLR), said these rates were yet to peak and might rise further by 10-15 basis points (bps).

This change primarily affects corporate loans, which are linked to the MCLR, reflecting the cost of funds for the bank. Retail loans, on the other hand, are linked to the external benchmark lending rate (EBLR), usually tied to the Reserve Bank of India’s (RBI’s) policy repo rate.
 

The decision to raise the MCLR comes after RBI Governor Shaktikanta Das asked banks to reassess their business models in view of the persistent gap between credit and deposit growth rates. The central bank has maintained the repo rate at 6.5 per cent since February 2023.
 

A top SBI executive told Business Standard on condition of anonymity that deposit rate transmission was nearly complete and any future adjustments would be specific to maturity buckets for asset-liability management. 

 

“However, there is room to tweak the lending side where MCLR is the benchmark, by around 10-15 bps,” the 

executive said.
 

SBI had increased MCLR by 10 bps across all maturities effective June 15. The one-year MCLR, to which most loans are linked, stands at 8.75 per cent. 
 

While the cycle of deposit rate hikes may have peaked, its effects on the lending side will continue in the coming months. Tight liquidity conditions have driven banks to offer higher rates to depositors to meet credit demand. 

The resulting increase in the cost of funds will impact the computation of MCLR, which serves as the benchmark for pricing loans to small and medium-sized enterprises.

Last week, SBI Chairman Dinesh Khara had indicated that deposit rates had peaked.

As of March 2024, MCLR-linked credit comprised 36-37 per cent of SBI’s loan book. For all scheduled commercial banks, MCLR-based credit accounted for 39.4 per cent of total credit, according to RBI data.

The RBI’s State of Economy report (May 2024) showed that in response to a 250-bp change in the policy repo rate since May 2022, the weighted average domestic term deposit rates on fresh and outstanding deposits increased by 259 bps and 185 bps, respectively.

The rise in MCLR mirrors the increased cost of funds that comes with a lag. The one-year median MCLR increased by 166 bps from May 2022 to April 2024. Another SBI executive said there was still room to raise lending rates by 10-15 basis points to stabilise net interest margins.

“There is hardly any room to tweak rates in the retail segment, including home loans, due to intense competition. The sentiment in industry and services is positive and gathering momentum. Plus, the tempo of capital expenditure is bringing opportunities. Units and enterprises are flexible to pay additional money for loans,” the executive said.

Karan Gupta, head and director of financial institutions at India Ratings, said the prospective MCLR hike should be viewed against the backdrop of continuing upward pressure on the cost of funds driven by deposit repricing.

Gupta also said banks’ margins would be impacted when the RBI cuts the policy repo rate later in the financial year, as many retail loans are linked to external benchmarks like the policy repo rate.

Lenders have to immediately pass on policy rate changes to borrowers, which can affect margins instantly, he said.