BOI reduces MCLR up to 25 bps, deposit rate cut next
Hike in working capital demand likely soon
Government-owned Bank of India (BOI) will reduce its benchmark marginal cost of funds lending rate (MCLR) by 15-25 basis points across categories from Wednesday.
This follows the Reserve Bank of India’s (RBI’S) huge liquidity injection to directly address the stress in financial conditions caused by Covid-19. The MCLR at BOI for a year stands reduced to 7.95 per cent from the earlier rate of 8.2 per cent. The new lending rate for overnight borrowing is 7.25 per cent.
The external benchmark lending rate, linked to RBI’S repo rate, has been reduced by 75 basis points (bps) to 7.25 per cent. With this, the bank has passed on the benefit of the rate cut announced by RBI on Friday, to its home, vehicle and small and medium sized (MSME) customers, BOI stated.
RBI has expanded liquidity in the system sizably to ensure financial markets and institutions are able to function normally, in the face of Covid-related dislocation. It also wanted to ensure bank credit flows on easier terms are sustained to those affected by the pandemic.
On an increase in demand for credit due to the sharp rate revision and package, public sector bank executives say working capital usage is expected to go up in the near future, as companies might need funds to pay salaries. The picture on investment credit is unclear. A recovery after control of the pandemic and lifting of the lockdown will provide clues for longterm credit demand.
The surfeit of liquidity in the system will also put pressure on deposit interest rates. A K Das, managing director and chief executive (MD & CEO) of BOI, said they’d revise these, too, as liquidity is not an issue now. When there is huge transmission happening on the asset side, the liability side might also have to be realigned. The asset-liability committee will decide.
Mrutyunjay Mahapatra, MD and CEO at Syndicate Bank, says: “We are looking at ways to quickly transmit the lower rates. The cost of funds also needs to come down. At the same time, we need to keep the interest of depositors in mind.”
RBI’S other move
Experts are pondering the likely effect of RBI’S ~1-trillion Targeted Long Term Repo Operation (TLTRO). It is thought to be unlikely to help lower rated firms much, as banks would still be interested in buying bonds of top rated entities. However, the benefit might eventually accrue to the weaker ones, as yields across the rating range will fall because of the liquidity support.
“The TLTRO will result in purchase of higher grade corporate bonds in the first place. Lower rated companies might not benefit directly from TLTRO immediately but gradually, due to the reduction in spreads from it on AAA bonds,” said B Prasanna, global markets head at ICICI Bank.
After the announcement of TLTRO, yields on Aaa-rated bonds fell as much as 165 bps. However, bonds below AA rating are hardly traded in the secondary market. So, it would be hard to gauge the rates till companies start issuing bonds, with the financial year also coming to an end.
According to Prabal Banerjee, group finance director at Bajaj Group, the TLTRO does not automatically improve the plight of lower rated companies. However, the three-month moratorium on all term loan instalment payments has cheered all companies; they’d also like it to be extended.
“There is a need for at least six months of moratorium. Please understand, corporations do not want banks to sacrifice even one rupee; we want banks to get all the money. So, there is no question of forgoing interest altogether — that will be too much to ask and not be fair,” Banerjee said, while welcoming the RBI move.
However, on TLTRO being targeted for only investment grade bonds, Banerjee says these companies hardly need money in this environment, when capacity expansion is not happening. It is the lower rated or even unrated firms that should have been given some support.