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With the differential between base rate and marginal cost of funds-based lending rate (MCLR) rising to about 100 basis points (bps), credit rating agency ICRA expects a number of borrowers to switch to MCLR.
All rupee loans sanctioned and credit limits renewed with effect from April 1, 2016, are priced with reference to the MCLR. Prior to April 1, banks gave loans either at the base rate (to best-rated borrowers) or at a mark-up to the base rate.
Currently, MCLR-linked advances are estimated to be 15-20 per cent of the total banking sector advances, with the rest being linked to base rate.
ICRA has observed that deposits have surged and credit growth has declined post-demonetisation. To spur credit demand, banks have undertaken steep cuts in their MCLR in January 2017.
The agency assessed that while the marginal cost of funds for banks has declined post-demonetisation, the decline in their overall cost of funds has been much lower at about 65 bps during January 2015 to September 2016 on account of the time lag in repricing of old deposits.
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