Burden of NPA and Higher Cost of Funding Constraint in Fixing Lower MCLR

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  • RBI announced its Bi-monthly Monetary Policy by lowering of Repo Rate by 0.25 bps.
  • All have started expecting Banks to lower their MCLR resulting in the rate of interest on Home Loan, Retail Loans and other Loans to come down.
  • RBI and even the Government of India want Banks to pass on the reduction effect to the borrowers immediately.
  • Whereas Banks feel that Cost of Funds i.e. deposit rates are higher as compared to the loan rates, which means spread of Banks are low.
  • If Deposit Rates are reduced, depositors especially the pensioners, depending upon the interest income are badly affected.
  • Burden of NPAs is very high where charging of interest on NPA accounts is not allowed.
  • The effect of NPAs and higher cost of funds are the two main factors, banks are not in a position to lower down Marginal Cost of Lending Rate (MCLR), besides various other reasons (Like keeping Cash Reserves and Investment in Government Securities to maintain statutory obligations), in-spite of willingness to reduce the MCLR.

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