Since working capital loans will now be linked to MCLR, it will make them rate sensitive and affect margins in a downward interest-rate environment for banks, according to Religare
The Reserve Bank of India (RBI) has made four changes to the marginal cost of funds-based lending rate (MCLR) system which comes into effect from 1 April 2016. However, since fixed-rate loans up to three years will be linked to MCLR, it would be clearly negative for banks, says a research report.
Religare Capital Markets Ltd, in the note says, "Our interaction with bankers suggests that banks were thinking of using the fixed-rate loan approach to price working capital loans in order to avoid the margin impact. However, most of the working capital loans will now be linked to MCLR, making them rate sensitive. This will affect margins in a downward interest-rate environment."
As per the earlier guidelines, all fixed-rate loans were exempt from being linked to MCLR as the benchmark for determining interest rates. It has now been decided that fixed-rate loans up to three years shall be priced with reference to MCLR. Fixed-rate loans of tenor above three years will continue to be exempt.
As per the amended MCLR norms, banks will have flexibility in computing marginal cost of funds, which according to Religare is technical relief and its impact on net interest margin (NIM) would be minimal.
Earlier, to compute the marginal cost of funds, banks were asked to reckon the balances of deposits and other borrowings outstanding as on the previous day of reviewing the MCLR. Now banks have been given the option to reckon the outstanding balances of deposits and other borrowings as on any day not more than seven calendar days prior to the date from which the MCLR becomes effective. The chosen time lag shall be maintained consistently for a period of not less than one year.
Religare says even the method for calculating tenor of MCLR is more technical in nature. As per the amended norms, MCLR calculated shall correspond to the tenor of funds in the single largest maturity bucket, provided this is more than 30% of the entire funds reckoned for determining the MCLR, and the weighted average tenor of two or more maturity buckets that together account for more than 30%, if no single maturity bucket accounts for over 30% of the funds. The maturity bucket shall be arrived at by calculating the cumulative weightage based on the descending order of maturity time buckets.
Similarly, the prevailing date of disbursement is also more technical in nature as MCLR prevailing on the date of disbursement will apply on floating rate loans. The RBI has intimated that floating rate loans will be priced at the MCLR prevailing on the date of first disbursement (be it partial or full) instead of the date of sanction guided earlier. These loans will continue to be priced at that rate till future reset dates are determined. Religare says it continues to maintain its negative stance on the banking sector.