Despite the Reserve Bank of India (RBI) opting to keep the policy repo rate unchanged in its recent decision, at least three banks have proceeded to increase their lending rates by as much as 10 basis points. This move is notable, especially since the RBI has refrained from raising the policy repo rate for the third consecutive time since the April meeting of the monetary policymakers.
Among the banks that have raised their rates, Bank of Baroda (BoB) and Canara Bank have implemented a marginal cost of funds-based lending rate (MCLR) increase of five basis points each, while Bank of Maharashtra (BoM) has gone a step further with a 10 basis point hike.
The MCLR essentially represents the minimum interest rate at which banks are required to charge for loans. This adjustment in lending rates closely follows similar actions by peers like HDFC Bank and Bank of India (BoI), both of which also raised their MCLR on specific tenors. HDFC Bank, the country's largest private sector lender, raised its rate by 15 basis points.
Financial analysts within the banking sector anticipate that in the coming days, additional lenders will follow suit and revise their MCLR rates. It's important to note that these rates are tethered to an external benchmark that remains constant.
Since October 2019, all banks have been directed by the banking regulator to link new floating-rate loans, which include home and auto advances, to an external benchmark such as the repo rate. This change was enforced to expedite the transmission of policy rate cuts to borrowers, addressing a significant limitation within the MCLR regime. However, it's worth mentioning that a number of customers' loans are still pegged to the MCLR.
The RBI's data indicates that following the 250 basis point increase in the repo rate since May 2022, banks have also raised their repo-linked external benchmark-based lending rates (EBLRs) by a similar margin. Simultaneously, the one-year median MCLR of banks, against which home loans are benchmarked, rose by 142 basis points in the year leading up to May 2023.
According to RBI statistics, as of the end of March 2023, the proportion of EBLR-linked loans in total outstanding floating rate rupee loans from commercial banks was 49.6 per cent. In comparison, MCLR-linked loans accounted for 45.5 per cent of the total during the same period.