Banks across the country are planning to increase their lending rates as early as March or April in a bid to protect their margins. Banking are also currently witnessing high costs of borrowing in the market. The decision to hike the lending rates comes amid a time when the Reserve Bank of India (RBI) made no significant changes in the February 2018 monetary policy review.
Bond yields have increased significantly over the last few months. This has made it expensive for banks to issue certificates of deposit. When yields move up, bond prices fall and this is likely to trigger a negative sentiment in the market. The yield from 10-year g-sec bonds continues to remain high. Moreover, banks are also facing difficulties with the increasing costs of market borrowing.
Another significant factor is that banks are planning to hike their deposit rates to get more funds for their operations. Many banks have already been forced to implement a deposit rate hike. The country’s largest lender State Bank of India (SBI) has increased its deposit rates by about 200 basis points in the last two months. Bulk deposit rates for accounts with Rs.1 crore and above currently stands at 6.25%.
RBI is currently in the process of linking the base rate of banks with their marginal cost of funds based lending rates (MCLR). This is coming into effect from April 1 onwards. In some banks, there is a huge difference between their base rates and MCLR. For instance, SBI’s base rate currently stands at 8.65% whereas its one-year MCLR stands at 7.95%. This huge difference still exists despite the 30 basis points cut made in January.
Among the major banks that have hiked their lending rates, HDFC is at the top with 10 basis points increase in MCLR. This is followed by various other private banks including Axis Bank, Kotak Mahindra, Yes Bank, IndusInd Bank, etc. that have raised MCLR by 5 to 10 basis points.
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