SBI signals increase in its MCLR Rate by 10-15 bps

India's largest lender- State Bank of India (SBI) recently raised its marginal costs of funding rates (MCLR) and said that the rates would see a further hike in the coming days. The current 1 year MCLR was increased to 8.75% , effective from June 15 onwards.

MCLR primarily affects corporate loans, while retail loans are connected to the external benchmark lending rate (EBLR) which in turn depends on RBI's repo rate policy.

The MCLR was increased following RBI Governor Shaktikanta Das asked banks to review their business strategies due to the continued gap between credit and deposit growth rates. The repo rate has been held steady at 6.5 per cent by the Central bank since February 2023.

Though the deposit rate hikes have peaked, its impact on lending will continue to persist in the upcoming months. Tight liquidity conditions have led banks to increase the interest rates for depositors in order to satisfy credit needs.

This rise in the cost of funds will affect the calculation of MCLR, which is further used as a reference for setting interest rates on loans for small and medium-sized businesses.

According to an executive of the Bank, rate hikes in the segment of retail is not possible due to the intense competition and the positive industry sentiment. Moreover, with the growth of Capex opportunities, businesses are willing to pay additional money for credit loans.

Karan Gupta, head and director of financial institutions at India Ratings stated that banks would be affected in case the RBI lowers the policy repo rate later in the fiscal year, since a lot of retail loans are connected to external benchmarks such as the policy repo rate.