PSU banks raise loan rates as deposit costs rise

Public sector lenders Bank of Baroda (BoB), Canara Bank and UCO Bank on Sunday announced an increase in their benchmark marginal cost of fund-based lending rate (MCLR), a day after the Reserve Bank of India (RBI) released its monetary policy statement.

BoB and Canara Bank have increased their lending rates by 5 basis points on six-month and one-year tenures with effect from August 12. UCO Bank, too, has raised its lending rates by 5 bps, effective from August 10. One bps is 0.01 percentage point.

MCLR is the minimum rate at which a bank lends to corporate loan customers. For banks, the cost of funds or deposits plays a major role in determining the MCLR.

Last month, Bank of India hiked its MCLR for the one-year tenure by 5 bps with effect from August 1, while the State Bank of India increased its MCLR by 5 to 10 bps across tenures.

Many public and private sector banks have raised MCLR, reflecting the higher cost paid on deposits. HDFC Bank and IDFC First Bank raised MCLR by an average of 5 bps in January.


The cost of funds for banks is expected to rise by 25-30 bps in FY25, after having risen by around 140 bps since the start of the rate tightening cycle in May 2022, according to rating agency Crisil. Higher deposit rates will challenge bank profitability in FY25, the firm said last month.

In the June quarter of FY25, most banks saw a slowdown in deposit growth by 1.15% on average. Deposits of Yes Bank were down 0.75% to ₹2.64 lakh crore while for Bandhan Bank, it declined by 1.5% to ₹1.33 lakh crore.

Higher deposit costs and slower deposit growth rate vis-a-vis credit have been a concern for the RBI for the past year. "It is observed that alternative investment avenues are becoming more attractive to retail customers and banks are facing challenges on the funding front, with bank deposits trailing loan growth," said RBI Governor Shaktikanta Das in the monetary policy statement on Thursday. "As a result, banks are taking greater recourse to short-term, non-retail deposits and other instruments of liability to meet the incremental credit demand."