The recent MCLR hike has opened the floodgates for questions by borrowers, who are still trying to wrap their heads around its impact. MCLR, or Marginal Cost of fund-based Lending Rate, is the lowest interest rate at which banks are permitted to lend to customers. This rate can be reset at tenures of overnight, 1 month, 3 months, 6 months, 1 year, 2 years, and 3 years. These tenures are also fixed to ensure that the rate cannot be reset before that period, even if there is a change in the MCLR.
Banks link their deposit and loan rates to various MCLR tenures. Typically, a change in the repo rate is reflected in MCLR rates, though there can be exceptions… such as this time! This is the first time that rates have increased since 2019. Before that, they regularly went down during the COVID pandemic.
The present hike can be attributed to inflation caused by domestic and international geopolitical considerations, as well as macroeconomic factors. These have led to a sharp increase in the cost of funds raised from markets by banks, and increased deposit rates. MCLR, which has a direct correlation to both, has consequently increased.
However, there will be some respite for borrowers!
It’s important to understand that the MCLR hike is only applicable across floating rate loans, with no additional charges being levied on fixed interest rate loans. Simply put, the MCLR is applicable to floating interest rates for loans that are linked to external benchmarks such as repo rate/treasury bill rate. For such retail borrowers, interest rates will rise — resulting in higher EMIs on loans they are servicing, whether they are auto, home, or personal.
Having said that, there may not be a significant impact on retail loans as they are short-tenured. Today, the proportion of loans linked to MCLR is decreasing – with banks increasingly adopting the External Benchmarking Lending Rate (EBLR) for retail loans such as personal, education and MSME loans. Corporate lending, on the other hand, will witness a much greater impact of the hike – since about 60 percent of corporate borrowings are based on MCLR.
The hike’s impact on the Gold Loan industry will be restricted to loans linked to MCLR. However, it won’t substantially impact existing customers. The tenure of a gold loan is usually up to 12 months (short term), and banks link gold loans with 6 or 12-month MCLR. SBI, Axis Bank, and South Indian Bank are a few banks where gold loans are linked to MCLR. Now, coming to new customers.
They will witness an increase in interest rates due to an increase in MCLR. Having said that, an increase of 10 basis points by SBI and 5 basis points by Axis, Bank of Baroda, and Kotak Mahindra will not have a significant impact.
So, what can be an effective solution to safeguard borrowers’ financial interests?
First off, the borrower can request the bank to switch their existing loans or apply for new loans linked to repo rates. Repo loans will be more cost-effective to service since many banks have interest rates of less than 7 percent. Another feasible solution could be opting for a different lender that offers a more nominal rate of interest. All this information is available in the public domain, on the lenders’ and loan aggregator/comparison websites.
In case the borrower chooses to continue with the same lender, he/she can consider increasing the tenure of payment. This will help them spread the burden over a longer period, without having to pay higher EMIs. Some financial institutions may implement this themselves if MCLR rises. Partial pre-payment will also offset the interest burden for long-term loans such as home loans, as well as reduce overall payable interest. This, of course, is subject to each bank’s discretion and terms and conditions of borrowing.
— The author, Nitin Misra is co-founder, indiagold. Views expressed are personal
(Edited by : Ajay Vaishnav)