Public sector lenders, including the State Bank of India (SBI) and Bank of Baroda (BoB), have increased their marginal cost of funds based lending rates (MCLR). This move is expected to be mirrored by other lenders, raising borrowers’ interest rate burden.
The country’s largest lender, SBI, has raised MCLRs by 5 to 10 basis points (bps) across various tenors, effective Monday, July 15. Specifically, the one-month MCLR has been increased by 5 bps to 8.35%, while the three-month, six-month, and one-year MCLRs have been hiked by 10 bps each to 8.4%, 8.75%, and 8.85%, respectively. Additionally, the two-year loan tenor MCLR has been adjusted to 8.95% from 8.85%. This marks the second MCLR hike by SBI in the past two months, following a 10 bps increase across all tenors in June.
Bank of Baroda has also raised its MCLRs by 5 bps on select tenors, effective July 12. The one-year MCLR is now 8.9%, up from 8.85%, while the overnight and six-month MCLRs have been adjusted to 8.15% and 8.7%, respectively. UCO Bank, another state-run lender, increased its overnight MCLR rate by 5 bps to 8.15%, effective July 11.
These increases in MCLR come ahead of the Reserve Bank of India’s (RBI) next monetary policy meeting, scheduled from August 6 to 8. The six-member Monetary Policy Committee (MPC) is expected to keep the repo rate unchanged at 6.5%.
Banks review their MCLR of different maturities monthly on a pre-announced date with board approval. Since October 2019, the RBI has introduced the external benchmark based lending rate (EBLR), linked to the repo rate. All retail loans and floating rate loans to MSMEs are now tied to the EBLR.
The reasons
The recent adjustments in MCLR reflect the banks’ response to funding costs and regulatory guidelines, aiming to balance their lending practices with the evolving economic environment and monetary policy outlook.
Recent data indicates that bank loans have grown by 13.9% year-on-year, while deposits have only increased by 10.6%. Historically, banks had various means to raise funds to meet credit demand despite slow deposit growth. Some banks heavily relied on borrowing through bonds and other avenues, leading to more than half of their loan books being funded by non-deposit sources.
This reliance caused asset-liability mismatches, where banks borrowed short-term funds to finance long-term loans. These funds, often from less reliable sources, could withdraw at the first sign of trouble, unlike more stable deposits.
To mitigate systemic risk, the regulator now insists that banks primarily lend money sourced from deposits rather than market-borrowed funds. RBI Governor Shaktikanta Das recently expressed concerns about the persisting gap between credit and deposit growth in a meeting with bank chiefs. As a result, banks are prioritizing deposit growth over profitability, emphasizing stability as directed by the regulator.
