Corporates that are rated ‘AA’ or higher are now likely to move towards an external benchmark-linked lending rate (EBLR) from the marginal cost of funds-based lending rate (MCLR), especially after the Reserve Bank of India’s latest move to temporarily pause repo rate hikes, say experts.
“We don’t find corporates being reluctant to move to an external benchmark. In the case of corporates with high ratings, their borrowing costs are lower than the MCLR of banks, and hence, they tend to borrow linked to external benchmarks, such as repo or Treasury Bills, etc,” Paritosh Kashyap, president and head, wholesale banking, Kotak Mahindra Bank, said.
Also read: 20 applications for insurance firms in pipeline: Panda
“Further, with the pause by the RBI in the last policy and the consequent drop in yields of government securities, the acceptability of the external benchmark will be higher,” added Kashyap.
MCLR was introduced in 2016, when banks were given a formula to calculate their cost of funding and conduct a monthly review of their offerings across various tenors.
The external benchmark-linked lending rate was introduced in 2019 to ensure faster transmission of the monetary policy rate. The external benchmark rate is either linked to the repo rate or the T-bills.
While repo rate transmission happens immediately, the reset of the marginal cost of funds-based lending rate typically happens on an annual basis or a semi-annual basis.
In recent times, banks have been increasing the share of EBLR loans within the overall pie.
The share of outstanding floating rate rupee loans of scheduled commercial banks linked to EBLR rose to 48.3% in December from 39.3% a year ago. Similarly, the share of loans linked to MCLR fell to 46.1% in December from 53.6% a year ago, the latest data from RBI showed.
As of March 2023, the one-year MCLR stood at 8.55%, higher than the repo rate by 105 basis points.
While retail loans and loans to small and medium-sized enterprises are mandatorily linked to EBLR, corporates have the option to opt for either MCLR or EBLR.
“Ultimately, it depends on the bargaining power of the corporates, which depends on their size and credit profile. These entities with a relatively better credit profile can move to EBLR if they see fit,” Soumyajit Niyogi, director, core analytical group, India Ratings and Research, said.
“Borrowers with a relatively lower rating will have to accept whatever rate the banks offer,” he added.
Prior to the April monetary policy, corporates expected the RBI to hike the repo rate by an additional 25 basis points. Hence, they were hesitant to move to the external benchmark-linked lending rate, say experts.
Also read: Best Mid Cap Funds in 3 years: Top 11 mutual funds with 35% returns
In its latest monetary policy, however, the RBI surprised the market by leaving the repo rate unchanged at 6.50%.
With headline inflation numbers easing, many believe that this repo rate hike cycle is nearing its end.
On the other hand, MCLR is expected to increase further from current levels, with banks looking to hike the interest rate on fixed deposits further in order to cater to the strong demand for credit. In such a scenario, corporates may see EBLR as a better option, say experts.
“The market was expecting an immediate increase in the external benchmark by 25 bps. On account of this, corporates were hesitant to completely move to an external benchmark,” says Suresh Khatanhar, deputy managing director, IDBI Bank.
“However, the RBI has taken the decision to pause the repo rate, which has allayed some concerns. People may now look at EBLR.”