Despite sharp cuts by PSU banks, foreign banks command lowest MCLR

Even as the RBI is looking to finetune the Marginal Cost of Funds Based Lending Rate (MCLR) system to ensure better transmission, various sets of banks have lowered MCLR by different proportions over the past year or so. While PSU banks have cut MCLR the most since April 2016, when the new benchmark rate was first introduced, surprisingly foreign banks sport the lowest MCLR amongst all banks. MCLR of foreign banks are 30-80 basis points lower than that of leading domestic banks as of July 2017.

The lowest

Banks moved to the MCLR system last April, which considers the latest (at the time of review) rates offered on deposits or borrowings. This to some extent has helped in better transmission. But the sharp cut in lending rates since the beginning of the year, was essentially due to the surplus liquidity in the system post demonetisation.

SBI slashed its MCLR by 90 bps in January. Following SBI’s move, other banks were quick to follow with a 70-80 basis point cut. But since then, banks have kept MCLR more or less unchanged.

Since April 2016 until now, PSU banks have cut their one-year MCLR (median) by about 95 basis points, private sector banks by 70 bps and foreign banks by 80 basis points.

But despite the sharp cuts by PSU banks, foreign banks command the lowest MCLR within the sector.

Bank of Tokyo-Mitsubishi UFJ (7.2 per cent), Industrial Bank of Korea (7.2 per cent), American Express Banking Corporation (7.35 per cent), Australia and New zealand banking group Ltd.(7.45 per cent), Credit Suisse AG Bank (7.55 per cent) etc, are some foreign banks that have the lowest one-year MCLR as of July 2017. These rates are much lower than that of SBI---the country’s largest lender---with one-year MCLR at 8 per cent.

However, it is important to remember that of the overall credit within the banking system, foreign banks’ share is still a meagre 5 per cent. Hence the notably low benchmark rates may not matter much to the larger section of borrowers.

Why low

Nonetheless foreign banks’ MCLR has been among the lowest since the start of the new system in April 2016. Lower cost of funds and operating costs vis-à-vis domestic banks could be one reason for foreign banks’ relatively lower MCLR rates.

"Our MCLR is low because it is formula driven. Given our cost of funds, operating costs and return expectations, our MCLR works out to be among the lowest. Our cost of deposits are relatively lower than that of domestic banks,” says Hitendra Dave, MD & Head of Global Banking & Markets, HSBC, India.

HSBC offers 5 per cent on deposit for tenure from two to three years. This is much lower than the 6.25-6.5 per cent that most domestic banks offer on an average on similar tenure deposits. Many other domestic banks offer 7 per cent and upwards.

“For a large chunk of the banking system there is a significant NPA cost. The larger the NPAs, the higher is the effective cost of funds. If NPAs are kept under check the effective cost of funds works out lower,” says Dave.

Issue of transmission

The RBI has time and again nudged banks to transmit policy rate actions to the borrowers in its entirety.

“There is a fundamental flaw in assuming that transmission of rates has not happened,” says Dave. At repo rate, no bank gets deposits. Deposit rates take cues from the competitive environment, credit offtake and liquidity rather than just the policy rate, he adds.

“Over the last two years, there has been no divergence in the quantum of fall in deposit rates and MCLR," says Dave.

Interestingly, foreign banks have increased their MCLR by 10-20 bps in the month of July 2017.

“MCLR moves up and down based on cost of funds. As demonetisation has driven balances for the industry from CASA into deposits, it has resulted in higher cost of funds because of which most banks have raised MCLR lately,” explains Dave.

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