The State Bank of India (SBI), which holds the title of being the country’s largest public sector bank, has announced a hike in its Marginal Cost of Funds-based Lending Rate (MCLR) by 5 basis points (BPS) for three significant loan tenors—three months, six months, and one year. This adjustment, which is set to take effect from November 15, 2024, is expected to result in slightly higher borrowing costs for customers who are planning to take out loans with these time frames.
Specifically, the three-month MCLR has increased from 8.50% to 8.55%, the six-month MCLR has risen from 8.85% to 8.90%, and the one-year MCLR, which is often used as the benchmark for a variety of retail loans, has gone up from 8.95% to 9%. This rate change, however, only applies to these three specific tenors, as other loan tenors remain unaffected by the hike. For example, the two-year MCLR remains steady at 9.05%, while the three-year MCLR stays unchanged at 9.10%.
A basis point (BPS), which is often referenced in financial discussions, is a unit of measurement equal to one-hundredth of a percentage point. Therefore, a 5 BPS hike in these rates means that the lending rates for the affected loan tenors have increased by just 0.05 percentage points. While this may seem like a small adjustment, it can significantly impact borrowers depending on the size and duration of their loans.
The increase in MCLR will directly influence the rates for loans linked to these benchmarks, including home loans, personal loans, and auto loans. For borrowers with loans tied to the one-year MCLR, this change could mean slightly higher monthly payments due to the increase in interest rates. As these loans are often long-term, even small changes in interest rates can result in noticeable increases in the total repayment amount over the life of the loan. Home loan borrowers, in particular, may experience a rise in their EMIs (equated monthly instalments), which could stretch their budgets.
This move by SBI, which is the first major lender to adjust its MCLR for these specific tenors, could set a precedent for other banks in the country. With inflationary pressures being one of the major factors influencing borrowing costs, other banks may soon follow suit and raise their MCLR rates, leading to an overall increase in borrowing costs across the sector. This could affect the affordability of loans for consumers, making it more expensive to borrow for a range of purposes, including purchasing homes, cars, or financing personal projects.
**Aligning with RBI’s Policy on Inflation Control**
The recent hike in MCLR is in line with the broader strategy of the Reserve Bank of India (RBI) to manage inflation and maintain economic stability. The RBI has been consistently working to keep inflation under control, and this rate hike by SBI reflects the central bank's monetary policy stance. By making borrowing more expensive, the RBI aims to curb excessive borrowing and reduce inflationary pressures in the economy. The hike is also a reflection of the cost of funds rising in the financial system, which banks pass on to borrowers in the form of higher lending rates.
According to the latest figures from the RBI, the median one-year MCLR for all scheduled commercial banks (SCBs) in India remained unchanged at 8.95% in October 2024, which suggests that there is a trend of stability in the market, albeit with a cautious increase in lending rates. This could indicate a broader industry trend of rising borrowing costs, even if the increases remain relatively modest.
**Impact on Other Loan Types: Auto and Personal Loans**
Apart from home loans, SBI’s MCLR hike will also affect other types of loans that are linked to the one-year MCLR, such as auto loans. The exact interest rates on auto loans, however, can vary depending on the borrower’s creditworthiness and CIBIL score. Typically, customers with higher credit scores tend to qualify for lower interest rates, while those with lower scores face higher rates. Similarly, personal loans offered by the bank are also influenced by the MCLR, which in this case is set based on the two-year rate.
Borrowers looking to purchase a vehicle or consolidate debt through personal loans may now face a higher interest burden due to the increase in MCLR. For people taking out auto loans or personal loans, even small increases in the interest rate can result in significantly higher repayments over the life of the loan. This could make borrowing less affordable for some individuals, particularly those on tight budgets.
**Understanding MCLR and Its Impact on Borrowers**
The MCLR, or Marginal Cost of Funds-based Lending Rate, is a benchmark interest rate set by the RBI to regulate how much banks can charge borrowers for loans. Introduced in 2016, the MCLR system was designed to ensure that banks' lending rates reflect changes in the cost of funds. The MCLR is calculated by banks based on various factors, including the cost of deposits, the bank's operating expenses, and the profit margin. It essentially acts as the minimum interest rate below which banks cannot lend.
Under the MCLR system, banks are required to pass on the change in the cost of funds to borrowers. This makes the system more transparent and responsive to fluctuations in market conditions. Borrowers who took out loans under the older Base Rate system, which was replaced by MCLR in 2016, are not directly impacted by MCLR changes. Loans that were previously tied to the Base Rate system continue to be governed by the older rates, which means borrowers in this category are not subject to the recent MCLR hikes.
For new borrowers, however, any increase or decrease in the MCLR directly affects their interest rates. This is particularly important for those who have taken out loans in recent years, as changes in MCLR can lead to fluctuations in monthly repayments. The rise in MCLR, therefore, represents a shift in the cost structure for borrowers, especially those who have opted for loans linked to these specific rates. As the MCLR continues to change in response to economic factors, borrowers need to stay informed about how these shifts could impact their long-term financial commitments.
