EMIs to rise as banks set the ball rolling on increasing interest rates on loans


Interest rates on your loans are set to rise. While the Reserve Bank made no change in the monetary policy rate on Wednesday, the hawkish tone has set the ball rolling for banks.

To lead the way is HDFC Bank which raised lending rates by 10 basis points (bps) even as RBI paused on the key interest rates on Wednesday.

A basis point is one hundredth of a percentage point.

HDFC bank, country’s second largest private lender by assets and largest bank by market capitalisation, has raised MCLR for six months, one year and two years to 8.00 percent, 8.20 percent and 8.30 percent, respectively.

Other private banks including Axis Bank, Kotak Mahindra, IndusInd and Yes Bank also raised their MCLR by 5 -10 bps each.

The marginal cost of funds based lending rate (MCLR) refers to the minimum interest rate of a bank below which it cannot lend.

It is determined on the basis of cost of funds of banks.

Paresh Sukthankar, deputy managing director at HDFC Bank, had said last month after the bank’s third-quarter results that interest rates were set for a rise.

He had said, “Given, in particular, liquidity conditions and the fact that even at the system level loan growth for the first time now is outpacing deposit growth quite sharply, I think if anything, either rates will be in for a bit of a pause or if these liquidity conditions remain the way they are, there could be some upward pressure on both the deposit and lending rates.”

Although state-run Bank of Baroda (BoB) reduced its marginal cost of funds-based lending rates (MCLR) for tenures under one-year by 10-25 basis points, its one-year MCLR rate of the bank continues to be at 8.30 percent, to which most home loan rates are linked.

Deposit rates rise

Banks are also compelled to raise deposit rates so they can attract more funds. Typically, a deposit rate hike is followed by a rise in lending rate too.

Banks began by raising their bulk deposit rates, with SBI making the first move in November 2017. Between November 29 and January 30, the rate on one-year deposits of over Rs 1 crore at SBI has jumped by 200 bps to 6.25 percent.

RBI proposes, SBI disposes

Since January 2015, RBI has cut base rates by 200 bps against which the reduction by banks has been much lesser.

The banking regulator has, on several occasions, pulled up lenders for their “arbitrariness” in calculation lending rates keeping them high and flagged concerns over weaker monetary transmission.

This has forced some banks including State Bank of India to cut base rates as well. However, base rates continue to remain substantially higher than the MCLR.

For SBI, the one-year MCLR stands at 7.95 percent while the base rate still lingers at 8.65 percent (difference of 70 bps) despite the 30 bps cut made in January.

Chanda Kochhar, CEO and MD of ICICI Bank also recently said that the reduction in the interest rate cycle has stopped now.

For further pass through of policy rates to existing borrowers on base rate (loans taken before April 2016), RBI has asked banks to link the base rate with the MCLR from April 1, 2018 in order to bring the base rates at par with MCLR.This will ensure quicker transmission of the RBI policy rates.

Analysts say that about 30-40 percent of the system’s loans are still linked to base rate.

Even though one-year MCLR is stable for now, the rates are only likely to rise from here.

Stung by heavy provisions towards the NPAs and tepid credit growth along with capital requirements towards liquidity ratios and meeting Basel III norms, banks are facing a hard time with higher costs.

Bond yields

Additionally, higher inflation is also hurting the government bond prices whose benchmark 10-year yields moved up more than 100 bps since July last year. Banks, which are the biggest buyers of the debt, booked treasury losses for the third quarter and may face some trouble going ahead.

Since the second half of 2017, yields have moved up by 114 bps, in a period of about 7 months.

According to Soumya Kanti Ghosh, chief economic adviser to SBI said in a report, “We believe that currently the 10-year G-sec yield in India are at elevated levels and not in sync with macro fundamentals.”

Needless to say, such high yields push up government borrowing costs and are surely inimical to monetary policy transmissions, as this will put upward pressure on bank MCLR rates, he added.moneycontrol