Bond yields falling but loan rates could stay highhttps://indianexpress.com/article/business/banking-and-finance/bond-yields-falling-but-loan-rates-could-stay-high-5501277/

Bond yields falling but loan rates could stay high

The outcome was more visible for public sector banks which saw a spike in fresh loan rates compared to private ones, which saw a similar trend in July 2018.

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The gap between outstanding loan and fresh loan rates remained high at 62 basis points.

Yields on government bonds may be heading down but loan rates are going up and could trend higher. An upward movement in lending yields — a direct result of MCLR rate hikes over the last four-five months — is seen on the Reserve Bank of India’s data for system-wide average lending and deposit rates for September and October. MCLR is marginal cost of funds-based lending rate and banks charge customers a spread over this rate.

The outcome was more visible for public sector banks which saw a spike in fresh loan rates compared to private ones, which saw a similar trend in July 2018. The gap between outstanding loan and fresh loan rates remained high at 62 basis points.

A string of banks including SBI, HDFC Bank and ICICI Bank have hiked MCLR by 5-10 basis points in December. According to a senior SBI executive, “The current market does not necessarily call for an MCLR hike, but since we plan to make the deposit rates competitive and MCLR is based on incremental cost of funds, we had to raise it.”

The executive added the primary aim of the decision is to compete with the private banks as they have been hiking deposit rates lately. Banks have been compelled to raise lending rates since deposits are growing at a much slower pace than non-food credit, albeit on a higher base. —FE