'Banks can claw back Rs 1.2 lakh cr from CPs with MCLR regime'

With the new marginal cost of funds based lending rate (MCLR) regime set to lower banks' short- term lending rates, India Ratings has said competitive rates can help the system wrest back loans worth Rs 1.2 lakh crore from the commercial paper market.
Due to higher rates, outstanding commercial paper (CP) borrowing has grown to 14 per cent of the short-term bank credit in FY16, up from the 11 per cent a year earlier, the agency said in a report today.
With the reduction in rates, which will now be linked to cost of deposits in that particular tenor along with a mark-up, banks can regain lost ground, it said.

"Up to 3-5 per cent of this (outstanding CP borrowing), which is Rs 74,500 crore to Rs 1.2 lakh crore is likely to flow back into the banking system as rates get competitive."
Under the new system kicking-off tomorrow, banks are required to come up with short-term rates ranging from overnight rates to up to three years, based on the cost of funds for the same term, along with a mark-up.
These rates can be lower than banks' base rates, help them recapture the market share lost to alternatives like the CP market and in turn help aim of faster transmission of monetary policy actions.

"The MCLR will address the regulator's primary objective of expediting monetary policy transmission along with augmenting uniformity and transparency in the calculation methodology of the lending rates," India Ratings said.

The report estimates the shortest tenor MCLR for bigger banks can be up to 1 percentage point lower than the base rate, while on the longer tenor, the base rate can be higher by up to 0.30 per cent.
Reserve Bank had come out with the final guidelines on MCLR late last year and asked the banks to adopt the system from April 1.
Market leader SBI was the first lender to announce MCLR today, which range from 8.95 per cent to 9.35 per cent, as against the base rate of 9.3 per cent.

The rating agency said banks' margins will face "downward pressure" in FY17 in the transition to the new regime as large corporates will shift to MCLR.
The impact will be different across banks. Gaps in asset quality mismatch, floating rate books, Casa deposits, share of borrowing in the funding profile will decide the impact, the report said.
India Ratings said banks with a higher share of low-cost current and savings account deposits will face a lower impact. "Higher the Casa ratio, lower the time deposit ratio multiplier, leading to only a partial transition."
Similarly, banks with a relatively higher mix of domestic borrowings in form of longer-tenor senior or subordinated debt, will be better positioned in the current falling interest rate scenario, as the MCLR calculations would entail borrowing costs to be computed on an average basis.

With amended norms asking for fixed rate loans of up to three years being linked to MCLR, the agency said this will put further pressure on banks' net interest margins as it removes the possibility of using the fixed rate structure for working capital loans, which has been driving incremental corporate credit growth.