Chart of the Day: Loan pricing gets a transmission kick

The time gap between Reserve Bank of India’s policy rate changes and lending rate revisions by banks needs to be the barest minimum for monetary policy to be effective. Effective transmission has been a long learning for the regulator, one that the RBI has become better by practice. From the base rate regime that was replaced by the marginal cost based lending rate (MCLR) and now finally to external benchmark linked rate (EBLR), transmission of policy rate changes on to lending rates has quickened. As the chart above shows, EBLR linked loans are now more than 40 percent of the loan book of commercial banks while base rate is almost negligible. MCLR too is getting phased out as external benchmark gets adopted progressively. What’s more is the adoption of a new loan pricing regime is quicker during times of policy tightening. Therefore, the share of EBLR linked pricing in the loan book would surge from here on and that augurs well for margins. Private sector banks have adopted EBLR faster than public sector peers, which could be the reason behind the superior margins of the former. That said, MCLR’s share is unlikely to slip as some corporate loans could continue to be priced with it.