Will MCLR really lead to better monetary transmission?

Borrowers may continue to go to the commercial papers market to meet their short-term working capital requirements because money market rates continue to remain attractive compared with MCLR


SBI has announced seven MCLRs of varying maturity in the range of 8.95% (overnight) to 9.35% (two years), which is not much lower than the base rate of 9.3%. Photo: Pradeep Gaur/Mint
SBI has announced seven MCLRs of varying maturity in the range of 8.95% (overnight) to 9.35% (two years), which is not much lower than the base rate of 9.3%. Photo: Pradeep Gaur/Mint

Most banks have announced their MCLR (marginal cost of funds-based lending rate) ahead of the monetary policy on 5 April.

A closer look at MCLR of the largest public sector bank—State Bank of India (SBI)—shows the rates are not much different from the base rate and continue to be higher than the commercial paper (CP) rates, indicating that monetary transmission may not happen as rapidly as expected.

SBI has announced seven MCLRs of varying maturity in the range of 8.95% (overnight) to 9.35% (two years), which is not much lower than the base rate of 9.3%. Moreover, if the bank’s MCLR rates are compared with the corresponding CP rates, the latter are lower by at least 40 basis points across tenures.

A basis point is one-hundredth of a percentage point.

Additionally, SBI has chosen one-year reset for certain buckets.

Borrowers may continue to go to the CP market to meet their short-term working capital requirements because money market rates continue to remain attractive compared with MCLR.

Therefore, even if the Reserve Bank of India (RBI) cuts the repo rate by a quarter percentage point on Tuesday, there is limited head room for monetary transmission. This is because SBI has already taken the haircut and slashed deposit rates by 125 basis points in the past year, making further policy transmission challenging.

Public sector banks may not want to compress their margins, given the weak profitability and higher non-performing loans, unless RBI nudges these banks to reduce MCLR further or lower the tenure of the MCLR reset.

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