The marginal cost of funds-based lending rate (MCLR), the minimum lending rate below which a bank is not permitted to give loans, is likely to increase by 100-150 basis points year-on-year (YoY) in FY24, according to India Ratings and Research (Ind-Ra). The Fitch group-owned credit rating agency on Tuesday also said that the transmission of monetary policy in the banking system could intensify in FY24 driven by the sharp rise in banks’ marginal cost of funding.
The Reserve Bank of India (RBI) has hiked the repo rates by 250 basis points in stages to 6.5 per cent in February 2023. Responding to this banks has also raised median MCLR (of one-year duration) by 120 basis points between May 2022-February 2023, reported Bussines Standard (BS) citing RBI data. MCLR-linked loans, which are mostly given to corporate and business establishments, as of September 2022, had a 46.5 per cent share in outstanding floating-rate rupee loans, the report said.
The Ind-Ra said that drawdown from the Reverse Repo in FY23 to the tune of Rs 5 trillion has enabled banks to address a surge in the gap between incremental credit and deposit, and this will not be available in FY24.
“A tepid balance of payments (BoP) surplus of around Rs 600 billion would not bring any reasonable improvement in the aggregate deposit. Therefore, even if the policy rate remains stable for FY24, rates in the banking system will continue to face upward pressure,” the rating agency said.
Ind-Ra expects the system liquidity to tighten further in the coming two to three weeks of March 2023, owing to multiple factors such as advance tax payment, GST payment, and TLTRO maturity. It also said that with the onset of the year ending, the activity in the banking system is expected to accelerate, especially on account of credit offtake.
It added that the Reserve Bank of India (RBI) will remain supportive by ensuring the presence of required system liquidity; however, tools and mechanisms could vary between long-term Repo auctions and open market purchases of short-term bonds or T-bills.
Ind-Ra said that the upcoming period of tight liquidity could prove to be onerous for entities with a weak liquidity profile. Ind-Ra said, “The gap between credit growth and deposit has intensified in FY23. In general, credit creates deposits by way of endogenous deposit creation. Generally, credit creates deposits on an aggregate basis, however, there could be mismatches on an individual bank’s level. Moreover, the statutory reserve (CRR) and other leakages such as cash in circulation and outflow of forex create a gap between incremental credit and deposit.”