By pegging its one-year marginal cost of funds-based lending rate (MCLR) at 9.2 per cent, lower than the current 9.3 per cent benchmark base rate, SBI has raised the million dollar question: Will lending rates for borrowers fall with the new norms coming into effect from April 1?
While that has been the intent in the first place, further rate cuts by the RBI are imperative for lending rates to move lower from here. This is because banks might tinker with the mark-up (spread) on the MCLR; the final lending rate can hence be similar or lower to the existing rates, depending on each bank. Bank of Baroda adding a ‘strategic’ premium of 0.35 per cent to its MCLRs, is a case in point.
Also, since the guidelines apply only to loans sanctioned after April 1, the new lending rates will matter only to new borrowers.
The MCLR differs from the existing base rate system in that when calculating the cost of funds, the latest rates offered on deposits or borrowings are taken into account. Banks will have to review and publish every month their MCLR of different maturities — overnight, one-month, three-month, six-month and one-year. Loans can be benchmarked against a particular MCLR.
According to bankers, the three-month, six-month and one-year MCLR rates will be used more frequently to price various loan products. Working capital loans will be benchmarked to the three-month MCLR, while medium-term loans such as auto loans can be pegged against the six-month MCLR.
The longer term home loans will be priced against the one-year MCLR.
The spread game SBI has set its one-year MCLR, 10 basis points lower than its current base rate. Home loan borrowers are currently charged 9.55 per cent interest rate, a spread of 25 basis points above the base rate. New loans will be priced against the MCLR of 9.2 per cent from April 1.
According to Anshula Kant, CFO at SBI, new home loans will become 10 basis points cheaper, as the bank has decided to keep the spread unchanged. Car and personal loans too may be priced 5-10 basis points lower.
However, she added that the decision to maintain the spread was a commercial one, and other banks may choose to tinker with the spreads under MCLR. Few bankers have indicated that they would, in fact, increase the spread on loans against the MCLR if need be, to keep the resultant loan rate unchanged.
Bank of Baroda pegged its one-year MCLR at 9.3 per cent, 35 basis points lower than its current base rate. But by adding a premium (0.35 per cent) to the MCLR, it has offset the reduction in MCLR.
Benefit, if at all So, as a borrower, do you gain at all from the new norms? Yes, for one, with the new norms in force, you can expect quicker transmission of policy rates in future. This is because under the marginal cost of funds method, deposit rate increases or decreases immediately reflect on the banks’ cost of funds and hence, on lending rates. Most expectations are of a 25-basis-point rate cut in RBI’s policy review due next week. This can lead to further reduction in deposit rates and a fall in the MCLR.
Also, the use of different MCLRs can also work to a borrower’s favour. Since MCLR is a tenor-based benchmark rather than a single rate, this will allow banks to price loans more competitively based on different MCLRs. Banks, such as HDFC Bank, SBI and ICICI Bank that have a high share of low-cost deposits (current and savings account), will be able to price loans more competitively.
Currently, existing borrowers will continue to be charged interest on loans based on the earlier base rate system.
But given that rates will move lower under the MCLR in the coming months, it may be wise to migrate to the MCLR-linked loan rates.
Remember though, that this will lead to more volatility in loan rates.