Mumbai: Home and auto loans are set to get costlier as banks increase their benchmark lending rates. State Bank of India (SBI), Punjab National Bank (PNB) and ICICI Bank Ltd all increased their marginal cost of funds-based lending rate (MCLR) by 10-20 basis points on Thursday.
A basis point is one-hundredth of a percentage point.
After the MCLR system came into effect in April 2016, this is the first time banks have increased the benchmark lending rate, signalling a turn in the interest rate cycle.
SBI increased the one-year MCLR by 20bps to 8.15% from 7.95%, whereas ICICI Bank, the largest private sector bank, raised one-year MCLR by 10bps from 8.20% to 8.30%.
Most banks link lending rates for retail customers in categories such as home loans,personal loans, and auto loans to the one-year MCLR. However, some banks, including ICICI Bank and Kotak Mahindra Bank, have linked home loans to six-month MCLR. ICICI Bank has also increased it six-month MCLR by 10bps from 8.15% to 8.25%.
The increase in rates comes a day after SBI raised interest rates on term deposits by 10-75bps, which bankers and analysts attributed to tight banking system liquidity conditions. Banking system liquidity is consistently in deficit now compared to a surplus a few months ago. In the past three months, SBI has raised rates on bulk deposits twice. However, this is the first time after demonetization that it has raised term deposit rates on amounts below Rs1 crore.
“This is an impact of increase in cost of funds. Banks have increased the cost of deposit, hence, they will definitely pass on the cost in MCLR. The cost of funds increased because system liquidity has tightened to a great extent in the last few months. You have seen that the bond rates have also gone up quite sharply. The movement is not transitory and likely to remain so for at least six months considering the GDP and inflation numbers,” said Ashutosh Mishra, a banking analyst at Reliance Securities Ltd.
Existing borrowers on MCLR-linked loans will not see an impact as per their reset clause. For instance, for a home loans taken on November 2017 linked to one-year MCLR, new rates would only kick in a year later in November 2018. For new borrowers, loans will now get immediately expensive. Most banks have a spread, basically a mark-up, on home loans and other consumer loans.
