Canara Bank raised its marginal cost of funds based lending rate, or MCLR, for overnight to six month tenures by 5 basis points with effect from 12 June, amid tight liquidity conditions, while it left longer-tenure MCLR unchanged.
The overnight MCLR rose to 7.95% from 7.90%, the one-month rate to 8.00%, the three-month rate to 8.25% and the six-month rate to 8.60%, while the one-year, two-year and three-year rates were held at 8.75%, 9.00% and 9.05%. Bank of Baroda also revised its MCLR with effect from 12 June.
WHAT IS MCLR AND HOW IT WORKS
The marginal cost of funds based lending rate was introduced as a pricing benchmark that ties loan rates to a bank's incremental funding cost. Borrowers with MCLR-linked loans see a change at their loan's next reset date, through higher EMIs or a longer repayment tenure, depending on loan terms.
MCLR is intended to improve rate transmission by linking lending rates to actual funding costs. When a bank raises its short tenor MCLR, borrowers with loans indexed to that tenor generally see their interest costs rise at the next reset.
Adjustments to MCLR do not automatically change all outstanding loans. The timing of pass through depends on contract terms and the reset frequency of the underlying loan. For newly sanctioned floating rate loans linked to a revised tenor, the updated MCLR will set the baseline for pricing until the next review or reset as stipulated in the loan agreement.
MARKET IMPLICATIONS AND CONTEXT
BusinessLine reported that Indian banks were raising MCLR amid tight liquidity.
Retail borrowers whose home or vehicle loans reset against short tenor references also faced potential increases in monthly payments at the next reset date, subject to their loan contracts.
Canara Bank’s increase was confined to tenors of up to six months; it left pricing for longer tenors unchanged.