Companies want loans pegged to long-term MCLR

Corporate loans are mainly pegged to the marginal cost of funds-based lending rate (MCLR), the internal benchmark determining how frequently interest rates are reset. These are overnight, one-month, three-month, six-month, one-year, two-year and three-year.

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For instance, a loan benchmarked to the one-month MCLR would reset every month, and the new rate would depend on the prevailing rate in that particular month. With the Reserve Bank of India (RBI) moving ahead with an aggressive cycle of interest-rate hikes to regain control of inflation after the pandemic-era stimulus measures, companies expect borrowing costs to rise sharply over the next six months, upsetting their plans.

“Some corporate clients have approached us to move from one-month MCLR to at least a six-month rate. They have told us that moving to a rate that resets every six months or a year, instead of every month, would ensure a stable finance cost,” one of the bankers cited above said.

The banker said a large portion of the corporate loan portfolio is linked to one-month and three-month MCLR rates. The difference between the one-month and the six-month MCLR is anywhere between 20 and 30 basis points (bps), which corporates are willing to pay instead of seeing their loan rates reset more frequently in a rising interest rate scenario. One bps is 0.01%.

Asset-liability committees of banks meet every month to take stock of their incremental cost of funds and arrive at the new rates, which have started inching up, especially after the RBI began raising the repo rate. At State Bank of India, which hiked its MCLR by 10 bps across tenors, the difference between the one-month and the six-month MCLR is 30 bps. For rival public sector lender Bank of Baroda (BoB), the difference is about 25 bps.

“Their rates would initially go up. But given that more repo rate hikes are in the offing, it is quite possible that the one-month MCLR hikes would add up to more than what these clients would pay upfront,” said the second banker cited above, speaking on condition of anonymity.

This comes at a time corporate demand for credit is witnessing a revival, led by the government’s nudge in the infrastructure sector. The demand for bank loans is also fuelled, to an extent, by hardening bond yields that are making loans more attractive.

Bankers said that smaller greenfield projects like those for ethanol blending and several other small projects are being funded by banks. While there is a significant increase in demand, it will reflect in the numbers with a lag, they said. This lag is because after a loan is sanctioned, the pre-disbursal conditions will have to be met, and then project loans are gradually drawn down. Only disbursed loans would reflect in the credit numbers.

Non-food credit of banks grew 13.8% from a year earlier as of 1 July, RBI data showed.

“Demand for bank loans has increased due to commodity price push, higher inventory holdings and also an uptick in capacity utilization. Also, many corporates have moved back from the bond market and money market, as market interest rates have moved up much faster than the bank MCLRs,” said Samuel Joseph, deputy managing director, IDBI Bank.

Within bank loans, interest rates on repo-linked loans have moved up faster than MCLR-linked loans, since increases in repo rates have a straight pass-through, Joseph said. Since October 2020, RBI mandated banks to link all new floating rate retail loans to external benchmarks, and because most lenders chose to use the repo rate, the transmission of lending rate hikes is immediate. Although loans to small business customers are also based on external benchmarks, corporate loans are still primarily linked to MCLR.

On 12 July, rating agency Icra Ltd pointed out that with rising bond yields and reducing investor appetite for corporate bonds, corporate bond issuances stood at the lowest level in four years in the first three months of FY23. To meet funding requirements, large borrowers have shifted from the debt capital market to banks, which is also aiding the improvement in the credit offtake, it said.

“Contrary to trends of negative incremental credit during the first quarter of a financial year, the incremental credit growth for banks remained significantly positive in Q1 FY23 and was supported by credit growth across all segments,” Icra said.

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