Banks start raising lending rates to save margin erosion
Uco Bank and IDBI Bank have hiked their marginal cost of funds based lending rate (MCLR) rates by 5-20 basis points (bps) since June. Whenever there is an increase in MCLR, an internal benchmark, interest rates rise on all loans linked to it. SBI’s overnight MCLR stands at 8.1% and one-year MCLR at 8.85%.
“Deposit mobilization is still slow, and banks are coming up with deposit schemes at higher rates to mobilize deposits; so, rates are not coming off," said Karthik Srinivasan, group head - financial sector ratings at Icra Ltd. “The overall increase in cost of deposits for banks has resulted in the 5-10 bps hike in MCLR. Credit is still growing faster than deposits; so banks need to raise deposits for funding." However, not all loan rates are linked to MCLR.
In October 2019, the central bank introduced the external benchmark-based lending rate (EBLR) regime, directing banks to link their loan rates to an external benchmark like the repo rate. After this, floating interest rates for all retail and MSME loans were linked to EBLR. From 46.5% in June 2022, the share of MCLR-linked had dipped to 38.3% by March 2024.
Alongside, the share of EBLR-linked loans rose to 57.5% from 46.9% over the same period. Corporate loans are still linked to MCLR, although some banks have started offering top-rated corporates short-term loans on external benchmarks. “Banks are possibly hopeful that rates will start coming down in two-three months, and they are trying to protect their margins to the extent they can through these small MCLR hikes," Srinivasan of Icra added.
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