Even though the Reserve Bank of India (RBI) retained its policy rates, Bank of Baroda, Canara Bank, BoM have raised MCLR rates.
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New Delhi: In a big move, a number of public sector banks, including Bank of Baroda and Canara Bank, raised their marginal cost of funds-based lending rates (MCLR) by up to 10 basis points, even though the Reserve Bank of India (RBI) retained its policy rate at 6.50 per cent.
The MCLR is the minimum lending rate that banks can charge on loans. By raising the MCLR, banks are passing on the higher cost of funds to borrowers. This will lead to higher interest rates on loans, such as home loans and car loans.
MCLR Rate Hike: Details
As per the RBI’s latest move, banks will now have to hold 10% of their incremental deposits as cash reserve ratio (CRR) from August 12, 2023. This has led to an increase in the marginal cost of funds-based lending rate (MCLR) for Bank of Baroda and Canara Bank by 5 basis points.
The new one-year MCLR for both banks will be 8.70%, effective August 12. This is likely to increase the monthly repayments for borrowers who have taken out loans with MCLR-linked interest rates.
The Bank of Maharashtra has also raised its marginal cost of funds-based lending rate (MCLR) by 10 basis points. This means that the one-year MCLR, which is the benchmark rate for most loans, has increased from 8.50% to 8.60%. The revised rate is effective August 10, 2023, as per a report in the Business Standards.
Impact of MCLR Rate Hike: EMI’s To Go Up
Borrowers who have taken out loans with MCLR-linked interest rates are likely to feel the effects of the hike in MCLR rates quite strongly. These debtors will have higher monthly payments, which can strain their budget. The economy is also expected to be impacted by the rise in MCLR rates because it will become more expensive for firms to borrow money.
What’s MCLR, and How Does It Impact Loan Interests?
MCLR, or marginal cost of funds-based lending rate, is the minimum lending rate that banks can charge on loans. It is a benchmark interest rate that was introduced by the Reserve Bank of India (RBI) in 2016 to replace the base rate system. The MCLR is calculated based on the marginal cost of funds, which is the cost that banks incur to raise money from various sources. The MCLR is also influenced by other factors, such as the repo rate, the risk premium, and the tenor premium.
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The MCLR is important because it helps to ensure that banks pass on the benefits of monetary policy to borrowers. When the RBI cuts the repo rate, banks are expected to lower their MCLR rates, which will lead to lower interest rates on loans. This helps to stimulate economic growth by making it cheaper for businesses to borrow money and invest, as per Forbes.
