Companies want long-term MCLR linked loans

Corporate debt is primarily measured by the marginal cost of funds-based lending rate (MCLR), the internal benchmark that determines how often interest rates are reset. These are overnight, one month, three months, six months, one year, two years and three years.

For example, a loan benchmarked to a one-month MCLR will reset every month, and the new rate will depend on the rate prevailing in that particular month. With the Reserve Bank of India (RBI) going ahead with an aggressive cycle of interest rate hikes to check inflation after the pandemic-era stimulus measures, companies expect a dip in borrowing costs over the next six months. There will be rapid growth, which will affect their plan.

“Some corporate clients have approached us to go from one month MCLR to at least six months rate. They have told us that going to a rate reset every six months or a year instead of every month will ensure a stable finance cost,” said one of the above bankers.

The banker said a major chunk of the corporate loan portfolio is linked to one-month and three-month MCLR rates. The difference between the one-month and six-month MCLR is anywhere between 20 to 30 basis points (bps) which corporates are willing to pay rather than resetting their loan rates more frequently in a rising interest rate scenario. A bps is 0.01%.

Asset-liability committees of banks meet every month to take stock of their rising cost of funds and arrive at new rates, which have started rising especially after the RBI raised the repo rate. In State Bank of India, which increased its MCLR by 10 bps, the difference between one-month and six-month MCLR is 30 bps. For rival public sector lender Bank of Baroda (BoB), the difference is around 25 bps.

“Their rates will go up initially. But given that higher repo rate hikes are being made, it is quite possible that the one-month MCLR hike will be higher than what is being paid upfront by these customers,” said the second banker quoted above on the condition of anonymity. .

This comes at a time when there is a revival in corporate demand for loans due to the government’s nudge in the infrastructure sector. The demand for bank loans is also driven, in part, by hardening bond yields, making loans more attractive.

Bankers said small greenfield projects like ethanol blending and many other small projects are being funded by banks. He added that though there has been a significant increase in demand, it will reflect with a fall in numbers. This lag is because once the loan is sanctioned, pre-disbursement conditions have to be met, and then the project loans are gradually reduced. Only the loans disbursed will appear in the credit number.

RBI data shows banks’ non-food credit grew 13.8% from July 1 a year ago.

“The demand for bank credit has increased due to commodity price push, higher inventory holdings and increase in capacity utilisation. In addition, many corporates have withdrawn from the bond market and money market, as market interest rates have risen much faster than the bank MCLR,” said Samuel Joseph, Deputy Managing Director, IDBI Bank.

Joseph said that within bank loans, interest rates on repo-linked loans have risen faster than on MCLR-linked loans, as there is a direct impact of an increase in repo rates. From October 2020, the RBI has mandated banks to link all new floating rate retail loans to external benchmarks, and because most lenders have chosen to use the repo rate, transmission of the lending rate hike is immediate. Although loans to small business customers are also based on external benchmarks, corporate loans are primarily linked to the MCLR.

On July 12, rating agency Icra Ltd reported that with rising bond yields and waning investor appetite for corporate bonds, corporate bond issuance remained at its lowest level in four years in the first three months of FY23. To meet the financing requirements, large borrowers have shifted from debt capital markets to banks, which is also helping in improving credit offtake, it said.

“Contrary to the negative incremental credit trends during the first quarter of the financial year, incremental credit growth for banks turned significantly positive in Q1 FY23 and supported by credit growth across sectors,” Icra said.

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