Banks led by the State Bank of India (SBI) have started raising their lending rates, signalling a rise in equated monthly installments (EMIs) on retail loans, including home and car loans, more expensive borrowings for companies, and the end of a soft-interest regime which lasted for almost 18 months.
A day after hiking deposit rates by up to 75 basis points, SBI on Thursday increased the one-year Marginal Cost of Funds based Lending Rate or MCLR by 20 basis points (bps) to 8.15 per cent from 7.95 per cent. ICICI Bank, India’s largest private bank, raised its one-year MCLR from 8.2 per cent to 8.3 per cent and overnight MCLR rate from 7.8 per cent to 7.95 per cent. New loans will now become expensive as they are linked to the one-year MCLR.
The higher deposit and lending rates are a pointer to higher interest rates. This is the first increase in the benchmark lending rate after the MCLR regime came into effect in April 2016. As banks lend to retail customers on one-year MCLR, which is considered as the key lending rate, the interest outgo on all retail loans, including home loans, auto loans, education loans, certain personal loans and loans against properties is expected to be higher.
The development does not portend well for the government which is the biggest borrower, as its future borrowings are likely to be more expensive.
Punjab National Bank, the second largest state-owned bank, raised its one-year MCLR from 8.15 per cent to 8.30 per cent, three-year MCLR from 8.30 per cent to 8.45 per cent, and for five years from 8.45 per cent to 8.60 per cent. Other banks are likely to follow in the next few weeks.
SBI also raised its two-year MCLR from 8.05 per cent to 8.25 per cent and three-year MCLR from 8.10 per cent to 8.35 per cent. Its six-month MCLR has gone up from 7.90 per cent to 8 per cent.
According to bankers, the decision to revise lending rates as reflected in the one-year MCLR was due to the rise in deposit rates, the overall cost of funds and shortage of liquidity in the system. Under the present loan pricing mechanism that is based on the MCLR, any upward revision in the cost of funds, including deposits pricing, automatically leads to a pricing revision in loans. Banks generally revise MCLR on a monthly basis. Bankers feel that the Reserve Bank of India may now raise its repo rate in the next monetary policy review in April 2018. Bond yields have also been rising, putting pressure on the interest rates.
On Wednesday, SBI increased both the retail and bulk deposits rates by up to 0.75 per cent with immediate effect, signalling a rise in interest rates in the banking system. SBI hiked deposit rates by 50 basis points in four maturity buckets — 7 days to 45 days; 2 years to less than 3 years; 3 years to less than 5 years; 5 years and up to 10 years.
The increase in lending rates comes at a time when the economy is showing signs of revival. The GDP growth for the third quarter ended December 2017 was at 7.2 per cent as against 6.5 per cent in the second quarter and 5.7 per cent in the first quarter. On the other hand, non-food credit grew 11.59 per cent year-on-year (y-o-y) in the fortnight ended February 16. Credit offtake in the banking system was low in the mid-single digits till a few months ago. The rise in bond yields has fuelled some corporate credit demand for banks. Loan growth has been picking up after the drop in growth post-demonetisation and the implementation of the Goods and Services Tax (GST) regime, Nomura said in a note dated February 26.
The RBI last cut the repo rate by 25 basis points to 6 per cent in the August 2017 policy review. In its February 7, 2017 review, the Monetary Policy Committee (MPC) of the RBI had said that the economy is on a recovery path, including early signs of a revival of investment activity. Global demand is improving, which should help strengthen domestic investment activity. “The focus of the Union Budget on the rural and infrastructure sectors is also a welcome development as it would support rural incomes and investment, and in turn provide a further push to aggregate demand and economic activity,” MPC said in its statement issued on February 7.