India Inc may heave a sigh of relief as prominent banks’ MCLR unchanged in May

Company India may breathe a sigh of relief as prominent banks slammed the brakes from increases in the marginal cost of the money-based lending rate (MCLR). This will ensure that the cost of borrowing from banks is stable at current levels.

Banks like State Bank of India and Bank of Baroda left their MCLR unchanged in May 2023 in light of the Monetary Policy Committee (MPC) maintaining the status quo on the repurchase rate at its last meeting in April and term deposit rates almost peaking. .

Monetary Policy Committee meeting

The MPC is expected to continue with the status quo at its next meeting, scheduled for June 6-8, as well as in the wake of retail inflation in April 2023 easing to an 18-month low of 4.70 percent from 5.66 percent in March. .

The MCLR status quo by large banks comes at a time when credit to large industries has rebounded, rising by 3 percent in FY23 compared to 2 percent in FY22.

“If we can keep the cost of deposits down, we really don’t have to increase the MCLR,” said Manimkhalai, Managing Director and CEO of Union Bank of India. business line in a modern interaction.

Bank rates for corporate loans by reference to MCLR. This standard rate has four components: marginal cost of money; negative load on the calculation of the cash reserve ratio; Operating costs; and installment payment.

Banks fully transferred the cumulative 250 basis points increase in the repo rate from May 2022 to March 2023 to EBLRs. They price floating rate retail loans and MSME loans with reference to this indicator.

However, the MCLR index, the internal benchmark for pricing corporate loans, rose just 140 basis points over the same period.

Manimekhalai noted that around 40-45 per cent of Union Bank’s loan book (of Rs. 3,73,188 crore at end of March 2023) has already been re-priced due to increase in MCLR. In the current year, the remaining book will be re-priced, thus enabling the bank to maintain a net interest margin of at least 3 per cent.

There is no reason to increase the price

“From what I have seen, the peak in deposit rates has already been reached, with the maximum deposit rate offered by commercial banks being around 7.75 percent… Since the MPC took this status quo, the repurchase rate component of the MCLR is no longer t “Therefore, deposit rates by large banks have not been increased over any time periods,” said Madan Sabnavis, chief economist at Bank of Baroda.

Referring to RBI Governor Shaktikanta Das’s remark last week that improved CPI data for April gave the central bank confidence that monetary policy is on the right track, Sabnavis saw this as an indication that at the next MPC meeting, the status quo on the rate Repurchases will also continue. Therefore, there is no reason for banks to increase their deposit and lending rates.

Another reason banks have not increased deposit rates is that the gap between credit and deposit growth has narrowed. We are in what is called the off-season. So, credit withholding is going to slow. Therefore, there is no pressure to raise interest rates on deposits. “The net liquidity in the banking system is close to equilibrium,” said the Bank of England’s chief economist.