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Several public sector banks, including Bank of Baroda (BoB) and Canara Bank, have decided to increase the marginal cost of funds-based lending rates (MCLR) by up to 10 basis points, despite the Reserve Bank of India (RBI) maintaining the policy rate unchanged in its latest announcement. This move is expected to result in higher Equated Monthly Installments (EMIs) for loans linked to MCLR. The one-year tenor of the MCLR serves as the benchmark for most consumer loans. In a regulatory filing, BoB revealed that the revised one-year MCLR would stand at 8.70 percent, a marginal uptick from the current 8.65 percent. The bank has slated the new rate to take effect on August 12.
Likewise, Canara Bank also disclosed its decision to raise its MCLR by 5 basis points, pushing it to 8.70 percent. This alteration is scheduled to be implemented on August 12. Another public sector player, the Bank of Maharashtra (BoM), has joined the trend by announcing a 10-basis-point hike in its MCLR. This shift will take the rate for the one-year MCLR to 8.60 percent, compared to the previous 8.50 percent. BoM clarified that this revised rate would come into force on August 10, 2023. The recent meeting of the Reserve Bank of India's Monetary Policy Committee (MPC) concluded with a decision to maintain the policy repo rate at 6.50 percent.
RBI Governor Shaktikanta Das, addressing the outcome, underlined the committee's readiness to act as required. He explained that with the ongoing monetary transmission and headline inflation surpassing the 4 percent target, the MPC's primary focus remains on withdrawing accommodation to align inflation with the target while simultaneously supporting growth. In a notable development, the RBI unveiled plans to introduce a framework that allows borrowers to switch from floating to fixed interest rates. This move aims to provide relief to borrowers, particularly those facing the burden of high-interest rates on loans such as home and auto loans. Governor Shaktikanta Das highlighted the importance of clear communication between lenders and borrowers regarding the tenor and Equated Monthly Installments (EMIs) under this new framework.
The MCLR, termed the marginal cost of funds-based lending rate, embodies the minimum lending rate banks can levy on loans. The RBI introduced it in 2016, supplanting the base rate system. Rooted in the marginal cost of funds, reflecting the expense banks incur from diverse sources, MCLR thrives on various influences like the repo rate, risk premium, and tenor premium. Significantly, MCLR serves as a conduit for banks to channel the benefits of monetary policy to borrowers. When the RBI slashes the repo rate, the onus falls on banks to curtail their MCLR rates, thus driving down loan interest rates. Forbes highlights that this manoeuvre boosts economic dynamism by making borrowing and investment more cost-effective.
This series of actions by public sector banks to revise MCLR rates, coupled with the RBI's decision to maintain the policy rate, signifies an active effort to manage lending rates in response to prevailing economic conditions. As borrowers brace for potential changes in their loan repayment obligations, the RBI's commitment to maintaining a balance between inflation and growth remains a guiding principle.
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