It’s a never ending tug-of-war between banks and India Inc.

With credit limit and terms coming up for renewal and revision this quarter, banks are having a tough time convincing their corporate clients that going forward, their loans will be benchmarked to the external benchmark rate, which is often linked to either repo or treasury bills (t-bills).

But the large corporate borrowers aren’t willing to consider this option. They want to continue in the MCLR or marginal cost of fund-based lending rate regime.

“In cases where the borrower has been a long time customer of the bank and has a very good credit history with us. We don’t want to let go of the customer and hence we are okay to continue with MCLR,” said a senior executive of PSU bank, who didn’t want to be named. 

Since May 2022, the repo rate has been increased by 250 basis points. In comparison, the weighted average lending rate has increased by 88 bps; from 8.69 per cent to 9.67 per cent during this period. The average 1-year MCLR in particular has risen from 7.25 per cent to 8.55 per cent, up by 130 bps, from May 2022 to March 2023.  

‘Prefer to stay with MCLR’

India Inc is reluctant to adopt repo rate based pricing citing reasons of likely imbalances and volatility in the business. As reset in MCLR mostly happens annually or in some cases, with corporates having BBB or lower rating on a semi-annual basis.

“This adds more stability to our business than having the rates reset every quarter which is what would happen if we opt for repo rate at this juncture,” said a CEO of a infrastructure company. 

Among corporate borrowers, it’s the NBFCs, power, infrastructure, cement and telecommunications companies who do not want to opt for repo-linked borrowing rates.

They prefer to stay with MCLR. Peculiarly though, in case of NBFCs, most of them end up borrowing from banks at MCLR, but they are increasingly lending to their customers on repo rates.

EBLR (External benchmark-based lending rate) is largely popular with retail loans, particularly home loans, where most other categories are still linked to MCLR. As of December 2023, 48.3 per cent of total loans of scheduled commercial banks are repo-linked, while 46.1 per cent is based on MCLR. 

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