Costlier retail loans subsidising advances to corporate borrowers

And as it did through 2022, banks were quick to charge retail borrowers more on loans for buying cars, homes or vacations. By contrast, the pace of transmission was positively more circumspect for corporates seeking credit, which is more often than not priced in line with a lender’s internal weighted average cost of capital. Central bank data showed banks raised their external benchmark-based lending rates (EBLRs) by 250 basis points during May 2022- March 2023, in line with the increase in the policy repo rate. By contrast, the marginal cost of funds-based lending rate (MCLR) — the internal benchmark for loan pricing for bulk borrowing — rose 140 basis points over the same period.

As per the central bank’s rules, all consumer, MSME and small business loans should be linked to EBLR while corporates can continue to borrow on MCLR linked rates.

Smaller loans, fatter margins
“My margin on a retail loan is around 6% while that of a corporate loan is in the range of 2%. That is why you see most banks predominantly focusing on consumer loans which does the heavy lifting to improve margins,” said a senior private bank official. “In a way, you can say that the rules are allowing us to subsidise corporate loans at the expense of retail borrowers.”

The EBLR regime transmits the increase to the borrowers faster. The weighted average lending rate (WALR) on sanctioned fresh rupee loans increased by 173 bps and that on outstanding rupee loans by 95 bps during May 2022 to February 2023, Reserve Bank of India (RBI) data showed.

More than four fifths of EBLRs are linked to the benchmark repo rate, and they now dominate the mix of outstanding floating rate loans, with the share rising to 48.3% by December 2022. Credit based on MCLR eased to 46%. Nearly 70.5% of all outstanding loans of private sector banks are linked to the EBLR, against 35.2% in the case of public lenders.

“Retail loan has become a major contributor to the incremental lending with the external benchmarking of retail loan and sharp increase in benchmark rates have bolstered banks’ net interest income (NIM),” according to India Ratings. “Banks have more pedals to ensure healthy NIM, and that enables them to act aggressively for the worthy wholesale borrowers. This will help high-rated wholesale borrowers to borrow at a finer rate from banks.”

MCLR shelf life
The central bank had recently said it is not considering any proposal to provide a sunset clause for marginal cost of funds-based lending rate regime “The reset between the borrower and banks normally takes place at an interval of at least once a year,” RBI Deputy Governor M. Rajeshwar Rao had said after the April monetary policy announcement.

“To that extent, the transmission may be slightly delayed. That is a point which can be noted. Having said that, I don’t think there is any proposal being considered at this point to what you call a sunset clause for MCLR.”

State Bank of India has 24% of the book linked to EBLR and 42% to MCLR. For Axis Bank, 39% of loan book is linked to repo rate, 22% to MCLR and 32% is fixed rate in nature. While ICICI Bank has 46% of domestic loans linked to the repo rate, 3% to other external benchmarks, 20% to MCLR and 31% of loans have fixed interest rates.

“Loans are not fully repriced with banks having flexibility to choose for certain segments,” said a report by Kotak Institutional Equities. “Given the recent increase in interest rates and loans having different repricing points, it is fair to assume that we still have some more room for interest rates to rise,” the firm added.