Synopsis: Banks have begun raising lending rates to counter the rising cost of deposits, as deposit rate hikes outpace lending rate increases. Major banks, including SBI, have adjusted their marginal cost of funds based lending rate (MCLR) rates by 5-20 basis points since June.
Current Trends
In response to the rising cost of deposits, banks have started increasing their lending rates. This move is aimed at mitigating the erosion of profit margins as banks face higher interest payments to depositors. Notably, the country's largest lender, State Bank of India (SBI), has increased its loan rates twice in the past two months.
Competitive Deposit Rates
To attract deposits in a highly competitive market, some banks are offering attractive one-time interest rates as high as 7% on high-value savings accounts exceeding Rs.200,000. This strategy reflects the intense competition among banks to secure deposits, which is essential for maintaining their liquidity and funding needs.
Disparity Between Deposit and Lending Rate Increases
There is a noticeable disparity between the rate hikes for deposits and lending. While the weighted average lending rate on fresh rupee loans has increased by 153 basis points (bps) from 7.86% to 9.39%, the weighted average deposit rate on fresh term deposits has surged by 226 bps from 4.21% to 6.47%. This indicates that banks are facing higher costs to attract deposits compared to the revenue generated from new loans.
Impact on Marginal Cost of Funds Based Lending Rate (MCLR)
Several prominent banks, including SBI, Bank of Baroda, HDFC Bank, Yes Bank, Canara Bank, Punjab National Bank, Uco Bank, and IDBI Bank, have raised their MCLR rates by 5-20 bps since June. The MCLR is an internal benchmark used by banks to determine the interest rates on various loans. An increase in MCLR leads to a rise in interest rates on all loans linked to it, thereby affecting the cost of borrowing for consumers and businesses.
As of now, SBI's overnight MCLR stands at 8.1%, while its one-year MCLR is at 8.85%. This adjustment reflects the banks' efforts to balance the cost of funds and maintain their profit margins amidst a challenging economic environment.
Conclusion
The banking sector is adapting to the pressures of rising deposit rates by increasing lending rates. This strategic move is crucial for banks to sustain their margins and ensure financial stability. However, it also implies higher borrowing costs for consumers and businesses, which could impact loan demand and overall economic activity.
Investors and consumers should stay informed about these rate changes and consider their implications on personal and business finances. Consulting with financial advisors can help navigate these changes effectively.
Disclaimer
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