HDFC Bank on Monday cut its marginal cost of funds-based lending rate (MCLR) by 5-10 basis points across tenures, potentially setting the stage for greater competition on lending rates.
The revision, effective September 7, brings HDFC Bank’s MCLR down to 7.90-8.60%, from 8.00-8.65% in August, according to the bank’s website.
The overnight and one-month MCLR have been cut by 10 bps each to 7.90%, while the three-month rate has declined by 10 bps to 8.05%. The six-month and one-year rates have been lowered by 5 bps each to 8.25% and 8.35%, respectively.
The two-year MCLR has been reduced by 10 bps to 8.45%, while the three-year rate has been cut by 5 bps to 8.60%.
The rate cuts come as banks contend with a sharp build-up of surplus liquidity, which could push lenders to compete more aggressively for credit and exert further downward pressure on lending rates. Banking system liquidity surplus stood at a record Rs 11.16 lakh crore as of Sunday.
The surge in Foreign Currency Non-Resident (Bank), or FCNR(B), deposits following the Reserve Bank of India’s relaxation of the interest-rate ceiling has added to the liquidity glut. HDFC Bank is estimated to have mobilised around $12 billion through FCNR(B) deposits, according to media reports.
A senior bank official said persistent surplus liquidity is likely to encourage lenders to step up credit deployment.
“I do expect banks to start lending a little bit more aggressively. Credit offtake as of now has been reasonably strong and that should continue, but yes, that excess liquidity will have an overhang on interest rates,” the official said.
Credit demand has remained robust despite the liquidity build-up. According to the latest RBI data, bank credit grew 18.3% year-on-year as of August 15.
With banks sitting on abundant funds and credit growth remaining healthy, competition for quality borrowers could intensify, putting further pressure on lending rates.