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RBI TO REVIEW MCLR REGIME

Bankers admit cost of funds has come down by 50-60 bps but transmission hasnt been more than 20-30 bps
NUPUR ANAND
Mumbai, 7 June

wo months after the start of the

marginal cost of funds-based
lending rate (MCLR), the new
benchmark to which the pricing
of loans is linked, the Reserve
Bank of India (RBI) is looking at reviewing
this regime.
We will shortly review the operations of
MCLR framework to iron out any issues It
is early days yet, it has been in place only
for a month. We have to see how it transmits
into lending rates. There is an MCLR
and banks have to add a spread to it and
we have to see how that moves. So, I think
it is going to take a little while before
we can assess fully whether it has
the effect intended, RBI Governor
Raghuram Rajan said.
This comes at a time when bankers
admit that while the cost of funds under the
new rate regime has come down by almost
50-60 basis points (bps) as compared to
the earlier base rates, the transmission
to end-consumers hasnt been more than
20-30 bps.
Marie Diron, senior vice-president,
Sovereign Risk Group, Moodys said the
transmission of the monetary policy will
depend on progress in the clean-up of
bank balance sheets.
This is because lenders can add a spread
component over and above the MCLR,
depending on the customers risk profile
and other considerations. After adding
this spread, the real effect of transmission
gets limited.
In turn, this end ups undermining the
whole idea behind MCLR, which was aimed
at a faster and better transmission.
Since 2015, the regulator has
reduced the key lending rate by 125 bps
(till December when the MCLR guidelines
were introduced) but banks had brought
down their base rates by only 50-60 bps
at that time. As a result, RBI introduced
the MCLR regime, which came into
effect on April 1. It was based
on marginal cost of funds instead
of the average cost of funds to
ensure that the rate cuts were passed
on quickly.
Another factor, apart from the spread
component, that has led to a slower
transmission is the lack of credit demand
that continues to hover in single digits.
In general, I think there is a paucity to
credit demand from the usual sources
which is why banks are not in a great
hurry to reduce rates either. They seem
to be suggesting that they will not be
attractive (to) a whole lot of new credit

Reserve Bank of India Governor Raghuram Rajan (second from right) with Deputy Governors (from left) S S Mundra, Urjit Patel and H R Khan after
PHOTO: KAMLESH PEDNEKAR
the second bi-monthly monetary policy 2016-17 press conference in Mumbai on Tuesday

HDFC Bank cuts 2-year

MCLR; BOB hikes for 1 year
Private sector lender HDFC Bank has
reduced its marginal cost of funds-based
lending rate (MCLR) the benchmark
to price loans by five basis points for
one-month bucket to 8.95 per cent and
9.25 per cent for the two-year bucket.
Public sector lender Bank of Baroda
hiked MCLR for one year by 10 basis
points to 9.4 per cent.
ABHIJIT LELE
if they reduce rates, so why not stay
with the existing borrowers and
so on, Rajan said.
As the difference between the
credit and the deposit growth widens

MCLR RATES OF SELECT BANKS

Bank name

Old
base

SBI
Axis Bank
Bank of Baroda
PNB
Canara Bank
HDFC Bank

9.30
9.50
9.65
9.60
9.65
9.30

MCLR
over-night

8.90
8.95
9.15
9.15
8.80
8.90

(Figures in %)
One
month

Two
month

Six
month

9.00
9.05
9.20
9.20
9.10
8.95

9.05
9.25
9.30
9.30
9.20
9.05

9.10
9.30
9.35
9.35
9.25
9.10

One
year

9.15
9.35
9.40
9.40
9.35
9.15

Source: Banks

further, with deposit growth outpacing

the former, banks will probably
become more inclined to deploying the
funds into lending instead of just
parking these in government securities.

However, instead of waiting to see

how the new lending rate regime takes
shape, the regulator will soon be taking
stock of the situation and if needed may
bring about changes.