Ahead of the Reserve Bank of India’s (RBI) monetary policy committee meeting on Wednesday, leading banks have already raised their interest rates on loans.
This means that, irrespective of whether the RBI raises rates or not, rates for all new borrowers of these banks for home, personal and car loans under the marginal cost of funds-based lending rate (MCLR) would be higher than prevalent rates before the revision. For existing borrowers, the rates will get revised in the next reset cycle based on whether the loan is linked with 1-year or 6-month MCLR.
According to a Mint poll of economists, the RBI’s monetary policy committee is likely to keep policy rates unchanged, but may raise them at its next meeting in August. Of the 15 economists surveyed by Mint, 11 expect the central bank to keep the repo rate—the rate at which the central bank infuses liquidity in the banking system—unchanged at 6%. Only four economists expect RBI to raise rates by 25 basis points (bps) in the meeting this week. Read more here. One bps is one-hundredth of a percentage point.
State Bank of India (SBI), ICICI Bank, Kotak Mahindra Bank and Punjab National Bank are among the banks that have revised their MCLR upwards for different tenures, while housing finance company HDFC Ltd has revised the prime lending rate by 10 bps.
Some banks have also revised their base rate, which is used to determine the interest rate on loans given out before April 2016. From April 2016 onwards, MCLR is used to benchmark the interest rate applicable on new loans.
But why are loan rates gradually going up, even though the RBI has not raised interest rates, yet?
Loan rates go up when the cost of funds for banks goes up. Simply put, to give loans to borrowers, banks need to gather deposits from customers. The interest given out to depositors determines the cost of funds for the banks. A deposit in a bank is a borrowing for the bank as it pays interest on it.
In the past few months, larger banks like SBI have increased deposit rates, for bulk as well as retail depositors. Even this time, just a couple of days before revising the MCLR, SBI increased the deposit rates. This rise in cost of funds gets translated into rise in interest rates on loans. Mitul Budhbhatti, associate director, Care Ratings, said the liquidity gained by banks during demonetization has now dried up; that coupled with increased demand in credit means there is a shortage of funds and hence rates are inching up.
“Credit growth for the banks was very slow in FY17. Now the credit growth has started to pick up. There is a fair degree of growth now vis-à-vis the previous year. This growth needs to be funded, so the banks are pushing up fixed deposit (FD) rates to attract deposits so that it can be used to support credit growth,” Budhbhatti said.
Moreover, stress in the banking sector in the form of non-performing assets (NPAs) too has had an impact, even if an indirect one. An NPA is a loan (an asset) that stops generating income. Banks have to make provisions for the losses likely to arise out of NPAs. This impacts their profit, and to prevent losses, banks keep interest rates on loans at a higher level.