The Impact of MCLR on Lending Rates: A Comparative Study of Public and Private Sector Banks

Abstract

In India, the opaqueness of bank lending rate determination has impeded the effective transmission of monetary policy. The BPLR, Base Rate, and the current MCLR system are some of the mechanisms that the RBI has implemented to solve issue. Although they are an option, external benchmark-linked loans are not yet widely used.

The Reserve Bank of India (RBI) provides guidance for banks as they set the MCLR, an internal reference rate. It helps banks set the lowest interest rates for different kinds of loans. Lending at rates lower than the MCLR is forbidden for banks, and noncompliance carries severe regulatory penalties. Nonetheless, with previous RBI approval, exceptions may be provided. Based on the marginal or incremental cost the bank incurs to secure each rupee lent to the borrower, the lending interest rate is determined.

The impact of MCLR on lending rates at banks in the public and private sectors is investigated in this study using comparative and analytical research design. The analysis's foundation includes secondary data from RBI reports, bank disclosures, and annual reports for the years 2018–2023. With an emphasis on MCLR trends and lending rate fluctuations, a sample of significant public and private sector banks is chosen. Relationships and differences are found using statistical methods like t-tests and regression analysis. The results are intended to shed light on how well MCLR works in interest rate transmission between banking sectors.

The study suggests that there are notable differences in the MCLR trends between private and PSU banks in light of these findings. In contrast to PSU banks, private banks notably exhibit more MCLR volatility. The study advises continuous MCLR trend monitoring and comprehensive evaluation of MCLR effects by pertinent stakeholders to guarantee competitive lending rates and efficient financial planning.