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Banks (Finance)

SBI Raises MCLR for First Time in Three Years, Signaling End of Soft Rates Regime

Strategic Insights

— 2 min read

The State Bank of India, India's largest commercial bank, raised the marginal cost of funds-based lending rates (MCLR) for the first time in three years, signaling the end of the soft rates regime that has prevailed since 2019. The bank increased the MCLR by 10 basis points (bps) across tenures to 7.1% (from 7% earlier), making it slightly lower than the 7.25% at HDFC Bank, Punjab National Bank, and ICICI Bank. Other public sector and private banks are expected to follow suit in the coming days.

Key Takeaways:

  • SBI raised MCLR by 10 bps to 7.1% across tenures, making it slightly lower than the 7.25% at HDFC Bank, Punjab National Bank, and ICICI Bank.
  • This is the first time in three years that MCLR has been raised, signaling the end of the soft rates regime that has prevailed since 2019.
  • Other public sector and private banks are expected to raise MCLRs in the coming days, following the lead of SBI.
  • MCLR-linked loans had a largest share (53.1%) of the loan portfolio of banks as of December 2021, and the rise in MCLR will lead to an increase in EMIs for borrowers who have taken home, vehicle, and personal loans.
  • The sustained decline in MCLRs in the last three years and periodic resetting of such loans at lower rates had helped existing borrowers, but the rise in MCLR will reverse this benefit.
  • Analysts and bankers expect the RBI to increase the repo rate from 4% in the June policy review, with a cumulative rate hike of 75 basis points in the cycle.
  • Deposit rates will also rise, with SBI offering 5.10% interest in the 1-2 year bucket, and deposit rates in the 1-3 year bucket falling from 8.75-9.25% in 2013-14 to 4.90-5.15% in 2021-22.
  • The tight monetary policy is expected to lead to a rise in interest rates, with the yield on 10-year benchmark government bonds reaching 7.15% and the cost of funds set to increase, prompting banks to hike lending rates.

Statistics:

  • SBI raised MCLR by 10 bps to 7.1% across tenures.
  • 53.1% of the loan portfolio of banks were MCLR-linked loans as of December 2021.
  • 39.2% of the total advances were EBLR loans in December 2021, according to RBI.
  • The yield on 10-year benchmark government bonds reached 7.15%, rising 24 bps in less than two weeks.
  • The cost of funds is set to increase, prompting banks to hike lending rates.
  • Analysts and bankers expect the RBI to increase the repo rate from 4% in the June policy review, with a cumulative rate hike of 75 basis points in the cycle.

Sources:

  • SBI
  • RBI
  • IE Online Media Services Pvt. Ltd.
  • Contify.com
  • SBI research report
  • Crisil
  • Y S Chakravarti, MD & CEO, Shriram City Union Finance

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