Syndicate Bank on Friday lowered both its marginal cost of funds based lending rate (MCLR), across all tenors, and the base rate by 10 bps to 9.60%.
State Bank of India’s (SBI) base rate is currently 9.3% while IndusInd Bank’s rate is 10.6%. Syndicate Bank’s MCLR for a tenure of one year is 9.55% while that of Bank of Baroda for the same tenure is 9.4%.
The bank has decided to levy a “strategic premium of 25 basis points over and above the MCLR”.
BoB’s base rate is 9.6%. Union Bank’s MCLR for one year is 9.45% while its base rate is 9.6%. Kotak Mahindra Bank’s base rate of 9.5% is lower than its one- year MCLR rate of 9.6%.
In order to facilitate monetary transmission and ensure that changes in lending rates are sensitive to movements in the policy rates, the central bank had introduced the MCLR as the benchmark for lending, instead of the base rate, from April 1.
The Reserve Bank of India (RBI) has been lowering the key policy rate with a view to enabling banks to lower loan rates. However, despite a 125 bps cut in the repo rate in 2015 — from 8% to 6.75% — banks have reduced base rates by a maximum of 70 basis points. State Bank of India (SBI), for example, reduced its base rate from 10% at the beginning of CY15 to 9.3% by the end of it.
However, with MCLR coming into effect from April 1, banks are being forced to pass on lower rates to the borrower almost immediately.
SBI’s overnight MCLR, for instance, is currently 8.9%, 40 bps lower than its base rate of 9.3%.
Vibha Batra, senior vice-president, ICRA, opines that MCLR is more receptive to rate movements either way because it takes into account incremental cost of funds, whereas the base rate takes into account the blended cost of funds.
The RBI has been optimistic about the MCLR achieving its objective of monetary transmission. “Our first estimate from the 26 largest banks in the system, accounting for about 83% of activity, has been that since the last week of March, the median overnight MCLR is down by 50 bps from the base rate and is down 25 bps across all tenors,” RBI governor Raghuram Rajan had said after its introduction.
Despite rates trending down, however, demand for loans remain sluggish. One reason for this is the surplus capacity in the economy estimated at around 25-30%. Companies have been hesitant to add capacity at a time when visibility on demand is hazy. Moreover, CMIE pointed out in a recent update that several projects were stalled either due to the lack of environment clearances or fuel linkages.
Non-food credit growth has not hit even 12% year-on-year in a single fortnight since the beginning of FY15; growth averaged 15.85% in FY13 and FY14.
High bank lending rates have seen companies moving their borrowings to the corporate bond market or to the commercial paper (CP) market for short-term loans. Firms have mopped up more money from the corporate bond market in each of the last two financial years than they have borrowed from banks, RBI and Securities and Exchange Board of India (Sebi) data showed.
For instance, while firms raised R4.58 lakh crore through the corporate bond market in FY16, bank lending to the industry grew by just R0.73 lakh crore. Similarly, while firms mopped up over R1.9 lakh crore from the CP market in May 2016, their borrowing from banks actually dipped compared to April.
Experts had expected some part of the CP market or anything between 3-4% or approximately R74,500 crore-R1.2 lakh crore to move back to the banking system as rates become competitive.
The yield on the benchmark ten-year bond has fallen to a three-year low of 7.385% from levels of 7.415% on April 4.