This means fixed interest loans that were earlier not susceptible to falling borrowing cost, will now be impacted by rate cuts.
Reserve Bank of India (RBI) has tweaked the marginal cost of lending rate(MCLR) linking all loans including working capital loans with a fixed rate of interest to the benchmark rate.
Earlier, working capital loans on fixed interest rate were exempt. Even working capital loans with fixed rate upto three years will now be linked to MCLR, making them rate sensitive. In a falling interest rate regime, the bank margins will be impacted. Only fixed rate loans of over three years will continue to be exempt.
Religare Securities in a report said, "This is clearly negative for banks. 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."
Banks are now pricing their loans based on the average cost of funding. With marginal cost of lending rate kicking in from April 1, lending rates are expected to be lower as the cost of deposits have been moving down. The highest deposit rate that banks offer is for the one-year deposit which has fallen between 7.25% and 8% while the current lending rates range from 9.30 to 10.25%, leaving scope for cut in lending rates.
With RBI expected to cut rates ushering in a lower interest rate regime, linking all loans including shorter tenure working capital loans will impact the net interest margins of banks.
Banks have been given the option take into consideration the outstanding balances of deposits and other borrowings any day and the MCLR will be effective after seven days of this computation.
The chosen time lag be maintained consistently for a period of not less than one year. 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. Religare said this is only a technical relief and impact on NIM will be minimal.
RBI also said that MCLR prevailing on the date of disbursement will apply on floating rate loans. RBI intimated banks 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 in its report said that this is more technical in nature.
RBI has been prodding banks to cut lending rates following the cut in the repo rate cut. While RBI cut repo rate or the rate at which it lends to banks by 1.25%, banks have only reduced lending rates upto a maximum of 0.80%. Computing the lending rate based on the marginal cost of funds RBI believes will help banks in lowering rates faster.
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