Indian companies are approaching banks to convert their loans to lower interest rates after the Reserve Bank of India (RBI) brought loans up for revaluation following two repo rate hikes.
These borrowers rated AA and above are looking to switch from the existing external benchmark linked lending rate (EBLR) to marginal cost of funds based lending rate (MCLR) to avoid higher interest expense.
Since MCLR is linked to cost of funds of banks, corporates believe that the rate at which MCLR rises will be slower as RBI raises the repo rate as compared to EBLR, which is linked to Treasury bills or the repo rate. Is.
During the last month, the 364-day T-bill rate has increased by about 150 basis points (bps) as compared to the MCLR, which has seen an increase of only 30 bps. RBI has increased the repo rate by 90 bps during the same period and is expected to increase by over 100 bps. One basis point is 0.01%.
The one-year Treasury bill stands at 6.28% as of June 22, compared to 4.8% in April.
“Some corporates who have repo linked loans want to switch to MCLR. Sometimes MCLR becomes cheaper. In a rising interest rate scenario, the repo linked loans get increased immediately, but the MCLR does not rise as fast. “Banks may agree to switch over at the time of re-pricing,” said the head of a public sector bank.
Under loan pricing based on external benchmarks, any change in the policy rate is immediately passed on to lending rates to new and existing borrowers. Banks are not allowed to adjust their spreads for existing borrowers for three years in the absence of any significant credit event. Borrowers under a falling interest rate scenario have so far enjoyed the benefits of this loan pricing, but are now looking at a sharper interest outflow as rates rise.
When policy rates were low and the system was liquidated in the last two years, banks were giving long-term corporate loans at slightly lower than the then repo rate of 4%. This helped boost credit growth in the system and allowed banks to make money quickly by lending additional funds to well-rated corporates instead of keeping them in the reverse repo window at 3.35%.
An official of a private sector bank said on the condition of anonymity, “Corporates feel that banks will not increase deposits by up to 2% and hence, MCLR also will not go to that extent, as it will increase the cost of funds. is based.” ,
However, economists are of the view that MCLR and repo linked loans will come together even though the pace of growth will be different.