The RBI’s new lending rate norm isn’t a simple ‘black or white’ affair. Based purely on mathematics, the system cannot fail. Banks will now have to calculate the cost of funds — a key component while arriving at the benchmark lending rate — based on the latest rates offered on deposits and not on their pricier legacy deposits. With deposit rates heading lower, the new marginal cost of funds-based lending rate (MCLR) will fall more sharply, dragging lending rates down at a faster pace. The devil lies in the details; or in this case, the devil is the detail. The 90-odd commercial banks have dutifully disclosed their MCLRs. If you had a hard time comparing rates across banks in the past, the task is now riddled with complexities. Not only do you have to track over 400 rates, you also have to understand which rate applies to which category of loans. Home loan rates can be pegged to the one-year MCLR while auto loans can be set against the six-month rate. Nor does a lower MCLR guarantee cheaper lending rates. Banks are free to charge a ‘spread’ over the benchmark rate, be it base rate or the MCLR. You can still end up with the same lending rate if a bank decides to tinker with the spread, even as it lowers its MCLR.
The new regime also does not open the floodgates to competition. If the base rate for most banks ranges between 9.3 and 9.7 per cent, the one-year MCLR hovers in the 9.2 to 9.6 per cent zone. SBI, HDFC Bank and ICICI Bank still offer the best deals. Sharp and frequent changes in MCLR, can also be unnerving to borrowers who love predictability. And , even if borrowers find some respite now, the tables will turn when rates move up. That will pinch more.
Radhika Merwin Deputy Chief of Bureau, Research