Private-sector lender Axis Bank on Monday trimmed its base rate by 10 basis points (bps) to 9.15%. The cut follows those by State Bank of India (SBI), which dropped its base rate by 15 bps to 9.1%, and HDFC Bank that lowered the benchmark rate by 25 bps to 9%. Despite the recent series of cuts, the lowest base rate in the system —HDFC Bank’s 9% — is equivalent to highest one-year marginal cost of funds-based lending rate (MCLR).
Investment bank Jefferies, however, points out that the differential in pace and frequency of cuts in base rate and MCLR has been such that currently the lowest base rate of 9% is higher than the one-year MCLR of most large banks, except that of IndusInd Bank and Dhanlaxmi Bank, both small lenders.
The base-rate cuts are being viewed as efforts by lenders to restrict borrowers from switching to the MCLR. While fresh loans sanctioned after April 1, 2016 are supposed to be linked to the MCLR, a majority of loans in the system remain tied to base rates.
As on December 31, 2016, SBI had only 40% of its loan book linked to the MCLR. The quantum was lower at most other large banks – between 9% and 12% at HDFC Bank, 20% at ICICI Bank and Punjab National Bank, 19.05% at Bank of Baroda, and 21% at Axis Bank. Bank of India was an exception, with 45% of its book linked to the MCLR.
Of late, a large number of older borrowers, especially retail borrowers, have put in requests to make the switch from the base rate to the MCLR.
A demonetisation-induced drop in the cost of funds had led to most banks reducing their MCLRs in January, with SBI effecting a 90-bps reduction to 8%. The January round of cuts had resulted in a meaningful widening of the differential between EMIs for MCLR-linked loans and those for base rate-linked loans.
“With increasing differential between base rate and one-year MCLR, the potential savings from switching was just getting higher and could be leading to higher conversion from MCLR to base rates,” Jefferies wrote. “By the recent base rate cuts, the banks have smartly tried to reduce this incentive and hence check the base rate to MCLR conversion.”
According to bankers FE spoke to, the share of base-rate borrowers who had switched to MCLR up to December 2016 stood at between 40% and 45% (of the corporate book only) at SBI, between 30% and 40% at HDFC Bank, 15% at PNB, 9.04% at BoB, and between 7% and 10% at BoI.
On Saturday, Reserve Bank of India deputy governor SS Mundra said banks would be pulled up in the upcoming new supervisory cycle of the RBI for failing to effect proper base-rate reductions. He said banks have been not transparent in passing on interest-rate cuts to borrowers, nor have they migrated majority of loans to MCLR.
He cited the example of a bank (without naming it), which has reduced the MCLR by 105 bps in the last one year and reduced the base rate by only 10 bps while retaining 70% of customers in the base rate regime. He said it was likely that other banks are doing the same.