Banks increase MCLR rates in response to repo rate hikes, affecting loan and deposit rates

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In a reflection of the rising cost of deposits amid challenges for mobilising resources and ongoing transmission of the cumulative repo rate hike of 250 basis points (bps) undertaken during May 2022-February 2023, more Banks are upping their Marginal Cost of Funds-based Lending Rate (MCLR).

This comes in the wake of RBI’s rate-setting monetary policy, at its meeting on August 8, keeping the repo rate unchanged at 6.50 per cent.

Rate Hike

Bank of Baroda (BoB), Canara Bank and UCO Bank, among others, on Friday announced that they will up their MCLR.

BoB has decided to increase its MCLR by 5 basis points on certain tenors with effect from August 12. Following this increase, the revised six-month and one-year MCLR will be 8.75 per cent (8.70 per cent) and 8.95 per cent (8.90 per cent), respectively.

Canara Bank too has decided to increase its MCLR by 5 basis points across the board with effect from August 12. Following this increase, the revised six-month and one-year MCLR will be 8.80 per cent (8.75 per cent) and 9 per cent (8.95 per cent), respectively.

UCO Bank has decided to up its MCLR on certain tenors by 5 basis points with effect from August 10. The revised six-month and one-year MCLR will be 8.80 per cent (8.75 per cent) and 8.95 per cent (8.90 per cent), respectively.

All floating rate rupee loans sanctioned and renewed with effect from April 1, 2016, were priced with reference to MCLR, which is the internal benchmark for such purposes.

Benchmark linkage

Further, to ensure better transmission of changes in policy repo rate, RBI asked Banks to ensure that all new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans extended to Micro and Small Enterprises from October 1, 2019, and floating rate loans to Medium Enterprises from April 1, 2020, are linked to external benchmarks such as repo rate or 3-month/6-month Treasury Bills.

In response to the 250 bps policy rate hike since May 2022, scheduled commercial banks (SCBs) have revised their repo-linked external benchmark-based lending rates (EBLRs) upwards. The 1-year median marginal cost of funds-based rate (MCLR) of SCBs increased to 168 bps during May 2022–June 2024, according to RBI.

Consequently, weighted average lending rates (WALRs) on fresh and outstanding rupee loans increased by 188 bps and 111 bps, respectively, during May 2022 to May 2024. In the case of deposits, weighted average domestic term deposit rates (WADTDRs) on fresh and outstanding deposits increased by 244 bps and 190 bps, respectively, during the same period, per central bank data.

State Bank of India had increased its MCLR on most buckets by 5-10 basis points last month. For example, SBI’s six-month and one-year MCLR are currently at 8.75 per cent (8.65 per cent prior to July 15th) and 8.85 per cent (8.75 per cent), respectively.

Earlier this month, Punjab National Bank had increased its MCLR by 5 basis points across the board. For example, the Bank’s six-month and one-year MCLR are currently at 8.75 per cent (8.70 per cent prior to July 15th) and 8.90 per cent (8.85 per cent), respectively.

Bank of India had increased its one-year MCLR by 5 basis points to 8.95 per cent with effect from August 1. Indian Bank had increased its overnight and one-month MCLR by 5 basis points each to 8.20 per cent and 8.45 per cent, respectively, with effect from August 3.