The State Bank of India or SBI raised its marginal cost of lending rate (MCLR) by 10 basis points across all mandates. The new rates will come into effect on Sunday, May 15. This is the second rate hike by the public lender in the past month. Following the revision of the rates, it is necessary to pay more for the assimilated monthly payment (EMI) for the mortgages and the personal loans.
With the latest MCLR rate hike, the SBI overnight, one-month and three-month MCLR rate now stands at 6.85%. It was 6.75% earlier. MCLR for six months, went from 7.05% to 7.15%. Similarly, the one-year MCLR was increased to 7.2% from 7.10%. The MCLR for two years went from 7.3% to 7.4%. The loan rate for a three-year term has been reduced from 7.4% to 7.5%.
What is MCLR?
Introduced by the Reserve Bank of India (RBI) in 2016, the MCLR or Marginal Cost of Funds Lending Rate is an internal benchmark interest rate allowing banks to offer loans at a competitive and transparent rate. Simply put, the MCLR is the minimum interest rate that banks are allowed to lend to their customers. It is usually calculated based on the term of the loan or the period in which a borrower must repay the loan. Banks also consider the cash reserve ratio, marginal cost of funds, maturity premiums, and the cost of operating the bank when deciding on MCLR rates. Lenders generally review the MCLR on a monthly basis.
Why Banks Increase MCLR
The central bank recently raised the repo rate by 40 basis points or 4.40% at an off-cycle meeting to manage soaring inflation. Following the rise in the repo rate, several public and private sector banks are increasing their MCLR. Lenders started increasing the MCLR in anticipation of the repo rate hike ahead of the official RBI announcement given the 17-month inflation figures in March 2022. The MCLR will continue to increase as the rise in the repo rate has pushed up the cost of funds for banks.
SBI MCLR Hike: What It Means For SBI Borrowers
After the rise in MCLR by SBI, interest rates for personal loans, home loans and car loans are expected to rise. This decision will affect those with variable rate loans, not fixed interest rate loans. “Any changes to the MCLR would have a direct impact on the cost of loans such as EMIs. EMI is directly proportional to MCLR. The higher the MCLR, the higher the EMIs to be paid by borrowers,” said Pramod Kathuria, Founder and CEO of Easiloan.
Rising interest rates will help the bank support its short-term margins, SBI Chairman Dinesh Kumar Khara said when announcing quarterly results last week.
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