New Delhi: Public Sector Banks Increase MCLR Rates, Impact on Borrowers and Economy
Bank of Maharashtra Bank News: The Bank of Maharashtra has raised its Marginal Cost of Funds-Based Lending Rate (MCLR) by 10 basis points, causing the one-year MCLR, the prevalent benchmark for numerous loans, to surge from 8.50% to 8.60%. This adjustment, detailed in a report by Business Standards, will take effect from August 10, 2023.
Public Sector Banks Raise MCLR Rates Despite RBI Policy Rate Unchanged
In a significant development, several public sector banks, including Bank of Baroda and Canara Bank, have increased their Marginal Cost of Funds-Based Lending Rates (MCLR) by up to 10 basis points. This move comes even as the Reserve Bank of India (RBI) maintains its policy rate at 6.50 percent.
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Understanding MCLR and Its Impact
MCLR, the Minimum Lending Rate, determines the lowest rate at which banks can lend money. By raising MCLR, banks transfer the elevated cost of funds to borrowers, leading to higher interest rates on loans, such as home and car loans.
MCLR Hike Details
According to the latest RBI directive, banks are now required to maintain 10 percent of incremental deposits as Cash Reserve Ratio (CRR) starting from August 12, 2023. Consequently, Bank of Baroda and Canara Bank’s MCLR has risen by 5 basis points. The new one-year MCLR for both banks stands at 8.70 percent, effective from August 12. This adjustment is anticipated to increase the monthly repayments for borrowers with MCLR-linked interest rates. Bank of Maharashtra has also followed suit, increasing its MCLR by 10 basis points, pushing the one-year benchmark rate from 8.50 percent to 8.60 percent, effective from August 10, 2023.
Impact of MCLR Rate Hike
Borrowers linked to MCLR-based interest rates are likely to experience a notable impact from the raised MCLR rates. These borrowers will face higher monthly installments, potentially straining their budgets. Additionally, the economy could be affected as the heightened MCLR rates make borrowing more expensive for businesses.
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Understanding MCLR and Its Influence on Loan Interests
Marginal Cost of Funds-Based Lending Rate (MCLR) replaced the base rate system in 2016 as a benchmark interest rate introduced by RBI. Calculated based on banks’ cost of raising funds, MCLR is influenced by factors like the repo rate, risk premium, and tenor premium.
MCLR is crucial in ensuring that the benefits of monetary policy are transferred to borrowers. When the RBI reduces the repo rate, banks are expected to lower their MCLR rates, thereby reducing interest rates on loans. This approach stimulates economic growth by facilitating affordable borrowing for businesses to invest, ultimately boosting economic activity.
Source: Forbes