For the first time in over two years, banks have started increasing the interest rates, indicating a change in the rate cycle.
The country’s largest lender, the State Bank of India (SBI), and the largest private sector bank, ICICI Bank, increased lending rates by up to 20 bps (basis points) — a move that will increase equated monthly instalments for home, car loans for its customers.
While the SBI has increased the one year marginal cost of funds based lending rate (MCLR) by 20 bps to 8.15%, ICICI Bank hiked it by 10 bps to 8.3%.
MCLR is the benchmark rate to which all the loan rates are linked. Rates in all other tenures of MCLR have also been increased. Most loans are linked to one year MCLR. This is the first time banks have increased MCLR since its introduction in April 2016.
Applicable to new customers
The new rates, effective from March 1, will be applicable to new customers. For the existing customers, the new rates will come into effect when the interest rates are reset.
A 10 bps increase in the lending rate for a ₹10 lakh home loan of 20 years will result in an EMI increase of ₹63.
SBI MD P.K. Gupta clarified that while MCLR has gone up by 20 bps, home loan rates for up to ₹30 lakh — that is the affordable housing segment — the increase will be limited to 5 bps.
The SBI and the Punjab National Bank (PNB) have also increased the deposit rates by up to 50 bps across various tenures.
“The bond yields have gone up by over 50 bps in the last few months. Most of the other banks have increased their deposit rate in the last one month. So when we were comparing our deposit rate with other banks’ rates, we noted the difference has become quite wide. So we decided to realign our [deposit] rates with the market rates,” Mr. Gupta said. “And when you change your deposit rates, the impact is also on the MCLR. The impact of deposit rate hike on MCLR works out to 20 bps.”
While the SBI will offer 6.40% interest rate on deposits for one year to 456 days, compared to 6.25% earlier, for deposits of over two years, it will pay 6.5%, compared to 6% earlier.
For one-year deposits, the PNB will offer 6.75%, compared to 6.5% earlier.
Repo rate unchanged
Banks have started raising their lending rates even though the Reserve Bank of India has kept the key policy rate or the repo rate unchanged since August 2017 monetary policy review, when it reduced the interest rates by 25 bps to 6%. While holding the rates steady, the central bank has maintained its neutral stance.
However, banks' interest income is under pressure due to rise in bad loans that has lowered their interest earning assets and exerted pressure on net interest margins.
Mr. Gupta said that since the lender had hiked both the deposit and lending rates, the impact on margins would not be significant.
