Despite the fact that the Reserve Bank of India (RBI) reduces the policy repair rate by 25 basic points to 6.25 percent in February 2025, banks are likely to be confronted with obstacles when passing on the benefits of the rate reduction as a result of the significant presence of loans that are still linked to older benchmarks as the marginal’s benchmarks.
According to the newest Monetary Policy Report (MPR) of the RBI, about 39.4 percent of the outstanding loans for the floating rate of planned commercial banks (SCBs) were still linked to MCLR and other older benchmarks such as the basic rate and benchmark Prime Lending Rate, transfer from end of December 2024.
Public sector banks (PSBs) continue to hold a significant part of the MCLR-linked loans, which have longer reset periods and adjust the loan percentages more slowly in response to changes in the repo speed. Private banks, on the other hand, have linked a higher proportion of loans to external benchmark-based credit rates (EBLR), which are directly influenced by the Repo percentage and are adjusted faster.
The delay in MCLR adjustments led to the fact that although the weighted average loan speed (Walr) on outstanding rupid lenses fell by only 7 basic points after the repo speed reduction, the Walr on new loans in the same period actually rose by 8 basic points. This reflects the constant fame of MCLR-linked loans in the portfolios of banks.
EBLR PUSH
Although the share of EBLR-linked loans has increased to 60.6 percent in December 2024 of 56.6 percent in March 2024, the transition remains incomplete. EBLR-linked loans, which are mainly found in segments of the retail and micro, small and medium enterprise (MSME), help improve the pace of monetary transmission, but the legacy of MCLR-linked loans remains a resistance.
The RBI had introduced the MCLR system in 2016 to improve the transfer of REPRATE changes, and later Mandated EBLR from October 2019 for most new loans in the variable and small business segments. Despite these reforms, the pace of the transition has gradually been.
Although transmission of the credit speed has demonstrated the improvement – especially during the first half of the FY25 – the competitive pressure between banks led to a narrowing of spreads, so that further downward adjustments are tempered. In the meantime, the deposit rates are climbing because of tight liquidity and a strong credit demand, which adds pressure to the cost structures of banks.
Between May 2022 and January 2025, the cumulative speed increase of 250 BPS resulted in an increase of 178 BPS in the 1-year-old Median MCLR and pushed Walr’s on fresh and excellent loans with 181 BPS and 115 BPS respectively. During the same period, weighted average domestic term positos on fresh and outstanding deposits with 253 BPS and 199 BPS respectively increased.
