State Bank of India indicates further increase in corporate loan rates | Finance News

State Bank of India indicates further increase in corporate loan rates | Finance News

State Bank of India indicates further increase in corporate loan rates | Finance News

Last week, SBI chairman Dinesh Khara signalled that deposit rates have peaked.


State Bank of India (SBI) – the country’s largest lender – which increased the marginal cost of funds based lending rates (MCLR) last week, said those lending rates are yet to peak and there could be another 10-15 basis points (bps) rise.


Loans to companies are linked to the MCLR, which depends on the cost of the funds of a bank. Retail loans are linked to the external benchmark lending rate (EBLR), which is mostly linked to the Reserve Bank of India’s policy repo rate.


The move to hike the MCLR comes after the RBI governor Shaktikanta Das asked banks to revisit their business model in view of the persisting gap between credit and deposit growth rates. The central bank has kept the repo rate unchanged at 6.5 per cent since February 2023.


A top executive at SBI told Business Standard on the condition of anonymity that deposit rate transmission is more or less complete and any changes are likely to be maturity bucket specific for asset-liability management. “However, there was scope for tweaking the lending side where MCLR is the benchmark, for around 10-15 basis points,” said the top SBI executive.


While the deposit rate hike cycle may have run its course and peaked, its effect would continue to be felt on the lending side in the coming months. The tight liquidity conditions pushed banks to offer higher rates to depositors for meeting credit demand. The rise in the cost of funds would feed into the computation of MCLR, which is the benchmark for pricing loans to small and medium-sized enterprises.

Last week, SBI chairman Dinesh Khara signalled that deposit rates have peaked.


In SBI’s loan book, the share of MCLR linked credit was 36-37 per cent as of March 2024. As for all scheduled commercial banks, MCLR-based credit had a 39.4 per cent share in total credit, Reserve Bank of India’s data showed.


According to RBI’s State of Economy report (May 2024), in response to the 250 basis points change in the policy repo rate since May 2022, the weighted average domestic term deposit rates on fresh and outstanding deposits increased by 259 bps and 185 bps, respectively.


The rise in MCLR reflects the increase in the cost of funds that comes with a lag. The one-year median MCLR increased by 166 bps from May 2022 to April 2024.


Another SBI executive said there is room left on the lending side to increase rates by 10-15 basis points to help stabilise net interest margins. “There is hardly any room to tweak rates in the retail segment, including home loans, due to intense competition. The sentiment in industry and services is positive and gathering momentum. Plus, the tempo of capital expenditure is bringing opportunities. Units and enterprises are flexible to pay additional money for loans,” the executive said.


Karan Gupta, head and director of financial institutions, India Ratings, said the prospective hike in MCLR is to be seen in the backdrop of continuing upward pressure on the cost of funds driven by the re-pricing of deposits.


Gupta also said banks’ margins would be impacted when the Reserve Bank of India cuts the policy repo rate later in the financial year. Many retail loans are linked to external benchmarks like the policy repo rate.


The lenders have to pass on policy rate changes immediately to the borrower, which may impact the margins immediately, he added.

First Published: Jun 17 2024 | 5:34 PM IST


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