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After a long spell of low interest rates, several state-owned and private sector banks have begun raising lending rates. Mint examines the reasons behind the rate hikes, and what it means for individuals and corporate customers.

Why are banks hiking rates now?

The steepest hike, of 10 basis points (bps), was announced by India’s largest lender State Bank of India (SBI). The bank raised its marginal cost of funds-based lending rate (MCLR)—an internal benchmark—after a gap of over three years, making loans pricier for firms and some retail borrowers. Others like Axis Bank, Bank of Baroda, and Kotak Mahindra Bank have raised lending rates by 5 bps each in April. Lenders have been hiking deposit rates since the beginning of 2022 and need to now make proportional changes to their lending rates to protect margins. The current rate hikes are limited to MCLR, a bench-mark that tracks  banks’  cost  of  funds.

Who will be affected by the rate hikes?

Hikes in MCLR rates will affect corporate borrowers and retail and small business borrowers who took loans before October 2019. The Reserve Bank of India (RBI) had asked banks to link all new floating rate personal, and micro and small enterprises loans to an external benchmark from October 2019 and medium enterprise loans from April 2020. These benchmarks include the policy repo rate, the three-month or six-month treasury-bill rate or any other benchmark market interest rate published by Financial Benchmarks India. But rate hikes for customers with loans on external benchmarks are not too far as RBI may raise the repo rate.

Rising costs
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Rising costs

Would more lenders follow suit?

Yes; more lenders are likely to announce lending rate hikes, considering SBI sets the ball in motion in such cases. To be sure, the quantum or even the need to revise rates will depend on whether MCLR benchmark components like marginal cost of funds and operating costs have changed for that particular bank. Also, hikes may be needed to protect net interest margins (NIMs).

What will be the consequences?

For companies, the hikes will make working  capital  and  term  loans  more expensive. Costlier commodities have driven up input costs and a higher interest outgo is expected to affect their profitability. Firms are also looking to raise term loans to fund capital expenditure and rising interest rates could affect this fledgling demand as well. That apart, the impending round of rate hikes when RBI raises the repo rate will affect all new retail borrowers. The turn of the rate cycle may also affect people’s decision to take on new consumer loans.

How  did  the  recent  MPC decision affect rates?

The interest rate scenario in India and globally is changing as central banks tighten covid-era easy money policies to tame runaway prices. The monetary policy committee (MPC) of RBI said on 8 April it will now focus on gradual withdrawal of accommodation. The yield on the 10-year government bond has since remained above 7%. This has led to a situation where bank lending rates are diverging from the bond market rates, a situation SBI chief economic advisor Soumya Kanti Ghosh said could dissuade banks from riskier corporate lending.


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