Ind-Ra expects the shortest tenor MCLR for bigger banks to be around 90bp-100bp lower than the base rate, while making it comparable to commercial paper rates with similar tenor. On the longer end (one year rate) considering the 70bp-75bp of tenor premium evident in the market, the difference from the base rate can be around 25bp-30bp.
Ind-Ra expects the MCLR to address the Reserve Bank of India's primary objective, of expediting monetary policy transmission along with augmenting uniformity and transparency in the calculation methodology of lending rates. Ind-Ra expects banks margins in FY17 to face downward pressure on the back of this transition; the impact however will be different across banks, based on the variances in their Asset Liability Management (ALM) gaps, floating rate book, current account savings account (CASA) ratios, share of borrowing in the funding profile and differences in their operating cost structure.
Ind-Ra expects banks with a higher share of stable CASA to see a lower impact. Higher the CASA ratio, lower the time deposit ratio multiplier, leading to only a partial transition. Ind-Ra believes that banks with a relatively higher mix of domestic borrowing (in form of longer tenor senior or subordinated debt) will be better positioned (in the current decreasing interest rate scenario), as the MCLR calculations would entail borrowing costs to be computed on an average basis.
Existing large corporate borrowers may be able to negotiate with banks, to shift their loans to MCLR, putting downward pressure on the margins. Aggressive refinancing of better rated corporates by banks with lower MCLRs is likely and it can further dent the competitiveness of many mid-sized public sector banks which are running high ALM gaps. The MCLR computation also factors in all operating costs, which will mean inefficient banks get penalized. Additionally, the MCLR provides flexibility to banks to reprice their floating rate book, compared to the base rate regime. Ind-Ra expects bank yields and margins to be volatile in the new regime and prudent ALM will become even more critical in managing competitiveness through interest rate cycles.
As per the latest amended MCLR norms, fixed-rate loans up to three years will also be linked to MCLR. Ind-Ra believes this can put further pressure on the net interest margin of banks, as it removes the possibility of using the fixed rate structure for working capital loans, which has been driving incremental corporate credit growth.
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