SBI has raised the MCLR for the first time in three years. As a result, borrowers who have purchased home, auto and personal loans will have their EMIs rising in the coming months.
George Mathew
State Bank of India (SBI), India’s largest commercial bank, on Monday raised the marginal price of MCLR (MCLR) for the first time in three years, the lowest interest rate rate since 2019. Indicates the end.
EMI will rise
SBI raises MCLR to 7.1% (up from 7%), up 10 basis points (PPS); SBI’s MCLR is now slightly lower than the 7.25% MCLR at HDFC Bank, Punjab National Bank and ICICI Bank. Bank of Baroda, Axis Bank and Kotak Mahindra Bank have raised their MCLR by 5 pps each. Other public and private sector banks are set to raise the MCLR in the coming days.
The MCLR, introduced by RBI on April 1, 2016, is the lowest interest rate offered by a bank or lender. This applies to new corporate loans and floating rate loans taken out before October 2019. The RBI then switched to the External Benchmark Linked Lending Rate (EBLR) system, which is linked to benchmark rates such as repo or treasury bill rates.
As a result of the increase in MCLR, borrowers who have purchased home, auto and personal loans will have their equivalent monthly installments (EMIs) rising in the coming months. Lending rates are expected to rise further in the coming months as the Reserve Bank withdraws its compliance policy (seeking to expand the money supply to boost economic growth).
MCLR-linked loans accounted for the largest share (53.1%) of banks’ credit portfolio as of December 2021. The MCLR is currently on the rise, after banks’ one-year average MCLR of 95 bps fell between March 2020 and January 2022. The decline of MCLRs over the past three years and the occasional rescheduling of such loans at lower rates have helped existing borrowers, while banks extended their benefits by reducing the WALR (Weighted Average Lending Rate) on outstanding rupee loans, rather than policy repo rate cuts during the EBLR period.
Banks have linked their EBLR to the RBI’s repo rate, down from 5.40% in October 2019 to 4%. When the RBI raises the repo rate, the EBLR rises and vice versa. According to the Reserve Bank, EBLR loans accounted for 39.2% of total advances in December 2021.
Interest rates will also rise
According to bankers, a gradual reduction in the money supply in the financial system is expected to raise interest rates. The “extraordinary” liquidity activities carried out in the aftermath of the epidemic, along with the cash flow paid through various activities of the Reserve Bank, contributed Rs. 8.5 lakh crore.
With retail inflation at 6.95% and headline inflation at 14.55% in March, the Reserve Bank is expected to take action to reduce prices. The reduction in liquidity of a policy of consensual nature is usually accompanied by an increase in interest rates in the financial system. The US Federal Reserve recently announced that it is tightening monetary policy and raising interest rates. The next phase of tariff hike is expected at the end of May-June. However, the tariff increase will be gradual.
Banks expect repo rate hike
Banks expect the repo rate to rise, the key policy rate since June, as the Reserve Bank seeks to reduce liquidity from the financial system to control inflation. Referring to the upward pressure on interest rates, yields on 10-year government securities reached 7.15 per cent, up 24 pps in two weeks. On the other hand, rising prices of funds are pushing banks to raise interest rates on loans.
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On April 8, the Reserve Bank’s Monetary Policy Committee restored the policy rate base to 50 bps under the Cash Flow Adjustment Facility by introducing the Standing Deposit Facility (SDF) at 3.75 for this facility. SDF is an additional tool used by the Reserve Bank to reduce excess cash flow. In essence, the charges were raised overnight to 3.75%.
WALRs for new and outstanding rupee loans have declined by 213 bps and 143 bps, respectively, in response to a 250-bps reduction in policy repo rates since February 2019. This cycle is currently turning upside down.
There may be a hike in June
Analysts and bankers expect the Reserve Bank to raise the repo rate from 4% in the June policy review. “With an overall rate hike of 75 basis points in the cycle, we now expect a 25-pps rate increase for each of June and August. In a rising interest rate cycle, the spread between bond yields and the repo rate will reach 7.75 per cent in September, ”SBI’s research report said.
The Reserve Bank has kept the repo rate unchanged in the last 11 policy reviews in a bid to boost growth. Banking sector sources said interest rates on loans and deposits are expected to rise across the board when the repo rate is finally raised in June or August.
Both policy rates last cut the repo rate to 4% and the reverse repo rate to 3.35% in May 2020, making it the first historic low. Shriram Citi Union Finance MD & CEO YS Chakraborty said, “Deposit rates have already started rising and with the recession, credit rates are likely to rise in the first half of the 2023 financial year.
“The change in tone at today’s meeting and the LAF downturn will prepare the markets for repo rate hikes, which we expect to be 50-75 basis points in the 2023 fiscal year starting with the June monetary policy review,” the rating agency Crisil said on April 8. Moreover, Chrysler said the rise would be accompanied by surprises emanating from inflation and external risks.
Deposit fees will also rise
Deposit rates are likely to “increase meaningfully” over the next couple of months, according to an SBI study. SBI now offers 5.10% interest over a period of 1-2 years. With inflation now at 6.95%, the fixed deposit holder has a negative return of 185 basis points. According to a study by the Reserve Bank of India, the 1-3 year deposit ratio has declined from 8.75-9.25% in 2013-14 to 4.90-5.15% in 2021-22. Despite lower interest rates, deposit growth during epidemics increased from 8% in FY20 to 11% in FY21. Since February this year many banks have increased deposit rates to 10 bps.
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