New Lending Rate system a boon for mid-sized banks

MUMBAI: The Marginal Cost of Funds based Lending Rate (MCLR) system could become a tool for
expanding business especially for the mid-sized private sector banks as it gives them an opportunity
to offer lower rates in short-term maturities, opening up a new market which was so far not within
the reach of these lenders.

The new MCLR regime, which was implemented from the current fiscal year,
applies to all new borrowers and is closely linked to bank deposits rates.
All new floating rate loans are now linked to MCLR.

The key difference between MCLR and the previous base rate regime is
that the new rates are divided into different baskets corresponding to bank deposits.
So banks will have an overnight MCLR, a one-month rate, a three-month, six month and one
year rate at which it can price its loans.

The only difference is that the loans have to be re-priced based on the
deposit basket which they are linked to, unlike rates in the base rate which used to move when
the bank used to change its rates.

This elimination of rigidity of base rate has opened doors for the likes of IndusInd Bank, Kotak Mahindra and
Yes Bank BSE 1.43 % to lend at lower rates and allowing them to compete with larger peers like
ICICI Bank BSE -0.64 %, SBI, Axis Bank and HDFC BankBSE -0.01 %. The difference in the shorter tenure is stark.
Yes Bank’s overnight and one-month MCLR at 8.80% is lower than ICICI’s (8.95% for overnight and one month rate),
despite ICICI’s assets being atRs7.17 lakh crore which is about seven times bigger than Yes Bank’s Rs1.15 lakh crore.

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