India’s financial stocks, especially corporate banks, have been very resilient over the past two days in spite of a large 90bp MCLR cut by the SBI. In this note we discuss the MCLR rate mechanism and possible impact on asset yields for banks over the next 6-12 months. While only a small proportion of current system loans is linked to MCLR and even that will reset with a 6 to 12 month lag, we believe refinancing will be large given the large rate reduction benefit for corporate, individuals, and this related migration from base rate to MCLR rates could lead to margin/PPOP pressure for banks.
For most large banks MCLR-linked loans currently account for 15-20% of total loans, with the exception of the SBI for whom the proportion of MCLR-linked loans is 40%. The rest of the floating loans are based on base rate and the reduction in base rates has been significantly larger. Since base rate-linked loans form 40-50% of banks’ loan book, MCLR cuts don’t automatically affect yields of base rate-linked loans.
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Hence the very-near-term impact of the MCLR cut may not be particularly great. While the low proportion of MCLR-linked loans and the 6/12 month reset on existing MCLR loans does imply that the near-term NIM impact may not be large, we see risk of refinancing as existing floating rate customers migrate to new MCLR pricing.