Companies want long-term MCLR-indexed loans

Corporate loans are primarily indexed to the marginal cost of funds-based lending rate (MCLR), the internal benchmark determining how often interest rates reset. These are one night, one month, three months, six months, one year, two years and three years.

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The future

For example, a one-month MCLR-indexed loan would reset every month, and the new rate would depend on the rate in effect that month. As the Reserve Bank of India (RBI) continues an aggressive cycle of interest rate hikes to regain control of inflation after pandemic-era stimulus, firms expect costs borrowing increases sharply over the next six months, upsetting their plans.

“Some corporate clients have approached us to upgrade from a one-month MCLR to at least a six-month rate. They told us that moving to a rate that resets every six months or a year, instead of every month, would provide a stable financial cost,” said one of the bankers quoted above.

The banker said a large portion of the business loan portfolio is pegged to one-month and three-month MCLR rates. The difference between the one-month and six-month MCLR is between 20 and 30 basis points (bps), which is what companies are willing to pay instead of having their lending rates reset more frequently in a rising price scenario. interest rate. One basis point is 0.01%.

The banks’ asset-liability committees meet monthly to take stock of their incremental cost of funds and come up with the new rates, which have started to rise, especially after the RBI started raising the repo rate. At the State Bank of India, which increased its MCLR by 10 basis points across all durations, the difference between the one-month and six-month MCLR is 30 basis points. For rival public lender Bank of Baroda (BoB), the difference is around 25 basis points.

“Their rates would initially increase. But given that more repo rate hikes are in the offing, it’s entirely possible that the MCLR’s one-month hikes will be more than what these clients would pay upfront,” the second banker said as quoted above. above, speaking on condition of anonymity.

It comes at a time when business credit demand is enjoying a revival, led by the government’s boost in the infrastructure sector. The demand for bank loans is also fueled, to some extent, by the tightening of bond yields which makes lending more attractive.

The bankers said that small new projects like those for ethanol blending and several other small projects are financed by banks. Although there is a significant increase in demand, this will be reflected in the numbers with a lag, they said. This lag is explained by the fact that after the approval of a loan, the pre-disbursement conditions will have to be fulfilled, and then the project loans will be gradually reduced. Only disbursed loans would be reflected in the credit figures.

Banks’ non-food credit rose 13.8% year-on-year as of July 1, according to RBI data.

“The demand for bank loans has increased due to the surge in commodity prices, increased inventories and also an increase in capacity utilization. In addition, many companies have pulled out of the bond market and money market, as market interest rates have risen much faster than bank MCLRs,” said Samuel Joseph, Deputy Managing Director, IDBI Bank.

Within bank lending, interest rates on repo-linked loans have risen faster than MCLR-linked loans because increases in repo rates have a direct impact, Joseph said. Since October 2020, RBI has mandated banks to link all new retail floating rate loans to external benchmarks, and as most lenders have opted to use the repo rate, the transmission of loan rate increases is immediate. . Although small business loans are also based on external references, business loans remain mainly linked to the MCLR.

On July 12, ratings agency Icra Ltd pointed out that with bond yields rising and investor appetite for corporate bonds reduced, corporate bond issuance settled at its four-year low in the first three months of FY23. To meet funding needs, large borrowers moved from the debt capital market to banks, which is also contributing to the improved drawdown credit, he said.

“Contrary to negative incremental credit trends in the first quarter of a fiscal year, incremental credit growth for banks remained significantly positive in the first quarter of FY23 and was supported by credit growth across all segments,” Icra said.

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