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Three banks raise lending rates by up to 10 basis points after RBI pause

Over the next few days, banking sector observers expect other lenders to revise their MCLR rates which are linked to an external benchmark that will not change

Our Special Correspondent Mumbai Published 12.08.23, 06:35 AM
Representational image.

Representational image. File photo

At least three banks have raised lending rates by up to 10 basis points even though the Reserve Bank of India (RBI) decided on Thursday not to raise the policy repo rate – the third time it has held its hand since the April meeting of the monetary policymakers.

Bank of Baroda (BoB) and Canara Bank hiked their marginal cost of funds-based lending rate (MCLR) by five basis points while Bank of Maharashtra (BoM) opted for a 10 basis point increase.

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The MCLR is the minimum interest rate that banks need to charge for a loan.

Their move comes just days after peers like HDFC Bank and Bank of India (BoI) also upped their MCLR on select tenors. HDFC Bank, which is the largest private sector lender in the country, had raised the rate by 15 basis points.

Over the next few days, banking sector observers expect other lenders to also revise their MCLR rates which are linked to an external benchmark that will not change.

Since October 2019, all banks have been linking new floating-rate loans that include home and auto advances to external benchmark like the repo rate.

This was done at the behest of the banking regulator which has been pushing for faster transmission of policy rate cuts to borrowers, identified as a major shortcoming in the MCLR regime. However, loans of many customers continue to be benchmarked to the MCLR.

The RBI has said that after the 250 basis point hike in the repo rate since May 2022, banks have revised their repo-linked external benchmark-based lending rates (EBLRs) upwards by a similar margin even as the one-year median MCLR of banks (against which home loans are benchmarked) rose by 142 basis points in the year to May 2023.

According to RBI numbers, the share of EBLR-linked loans in total outstanding floating rate rupee loans of commercial banks was 49.6 per cent at the end of March 2023 while it was 45.5 per cent in the case of MCLR-linked loans.

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