State Bank of India, SBI, the largest public sector bank, hiked its marginal cost of funds-based lending rate (MCLR) by 10 basis points. This is to take effect from May 15, 2022. As per media reports, this is SBI’s second hike in the benchmark lending rates in two months.
MCLR refers to the minimum interest rate below which financial institutions can’t lend as per RBI norms. To simply put, RBI fixes the internal reference rate for banks. This rate is the minimum interest rate applicable to different loans by the lending institutions.
Banks are usually not allowed to lend money at a rate below this reference rate called the MCLR.
From May 15, SBI’s one-year MCLR has been hiked to 7.20% from the previous 7.10%. Likewise, MCLR for two years has been raised to 7.40% from 7.30%, and for three years the benchmark is increased to 7.50% (7.40%).
As per a few media reports, SBI has also increased its deposit rates.
With the increase in lending rates, borrowers’ SBI EMIs are likely to go up. This is applicable only to those borrowers who have taken loans benchmarked against MCLR. The rate hike isn’t applicable to those loans under SBI’s external benchmark lending rate (EBLR) and repo-linked lending rate (RLLR).
Since most of the loans lent by SBI are linked to MCLR, most borrowers are likely to feel the pinch from next month onwards.
The rate hike by SBI is following the rate revision by RBI. Several banks have already increased their lending and deposit rates too.
For depositors, this is positive news as they are likely to earn a slightly higher interest rate on the deposit amount.
The rising interest rates environment generally bode well for the banks including SBI. It helps support the margins for the banks. According to Moody’s, a gradual increase in domestic interest rates will boost the net interest margins of lenders. This is because banks will be able to pass on higher rates to borrowers.
To understand better, the reason for the expansion in net income margin is that many customers have their money in their current or savings accounts. This is known as CASA in banking terms. These accounts carry a low-interest rate, and these rates are not frequently revised. Also, in the case of fixed deposits, it’s locked to lower the interest rate for a long period (usually beyond a year) until it matures.
As per media reports, SBI’s chairman has mentioned that about 75% of SBI’s book is linked to MCLR. So, when the interest rate increases, there is a positive impact on NIMs (net interest margin) going forward for SBI.
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Research Analyst: Bavadharini KS