In a sign that lenders are adopting a more cautious approach towards loan pricing, rates across the board have been on rise in the past couple of months.
As a result, they are recalibrating their lending strategies by increasing mark-ups on new loans, a move driven by the need to protect margins amid shifting interest rate dynamics.
While weighted average lending rates on outstanding rupee loans continued their downward glide from 9.67% in May to 9.38% in July, the fresh rupee loans saw a reversal. After bottoming out at 8.62% in June, fresh lending rates edged up to 8.80% in July, signalling a hardening stance among banks toward new credit disbursement.
Deposit rates adjust at a slower pace
Subsequently, the weighted average domestic term deposit rates have declined at a slower pace. For fresh deposits, rates fell from 6.11% in May to 5.61% in July, while outstanding deposit rates slipped modestly from 7.07% to 6.92%. This lag in deposit rate adjustment points to banks’ need to retain stable funding sources even as they attempt to manage margins. Meanwhile, the MCLR (Marginal Cost of Fund based Lending Rates) stood at 8.60% as of August 2025, down 15 bps compared to 8.75% in July 2025.
Karthik Srinivasan, Group Head Financial Services Ratings, ICRA, said, “Retail leading rates are linked to repo and with a cut in repo, lending rates have come down, but deposit costs have not come down as sharply. Therefore, banks are trying to increase spread on new loans to ensure they can reduce the impact on their margins.”
While public sector banks (PSBs) appear more aggressive in this repricing, private lenders are also adjusting their rates, more selectively. The yield from new loans is now consistently higher than that from existing portfolios, reflecting a deliberate effort to offset rising deposit costs and preserve profitability.
Protecting margins through repricing strategy
The divergence between fresh loan hardening and slower deposit rate easing reflects a nuanced shift in banking strategy, balancing credit growth with profitability and risk management. The difference in spread between lending and deposit rates for Scheduled Bank, including PSU, Private and Foreign banks as of July 2025, put together for Fresh/New Loan sanctioned stood at 319 basis points (bps), compared to 246 bps for existing outstanding loans.
“Banks are charging higher rates to new customers primarily to protect their margins,” explains Sanjay Agrawal, Senior Director at CareEdge Ratings. He noted that the transmission of rate hikes has been uneven, with lending rates falling faster than deposit rates, forcing banks to find a new equilibrium. This trend spans across loan segments, not just home loans and is likely to persist for at least six months as the system reconciles to the new normal. Agreeing with him, a senior banker from PSU bank said, “Banks are increasing mark-ups due to a combination of factors, including a demand slowdown in housing loans. Higher borrowing costs are also a significant contributor, with public sector banks facing increased pressure on their cost of funds. By raising mark-ups, banks aim to attract only serious borrowers and reduce the risk of bad loans, effectively using it as a filter mechanism and risk management strategy.” He further stated that the ability to do so is also because competition is doing so. Unlike existing investors, where lending comes down with policy action, repricing of deposits takes time, but for new customers, banks can set their own spreads over benchmark rates, enabling them to tailor price based on borrower profiles and market conditions.
“We need to now live with these high rates. It’s a market development, and unless liquidity improves significantly, there’s limited scope for downward pressure,” adds Agrawal. With savers demanding better yields and investors expecting returns, banks are caught in a balancing act, one that’s reshaping the cost of credit for consumers across the board. “We expect margins to pick up (or be stable). While Q2 margin should be the lowest as banks going forward will also get the benefit of deposit costs, which was not happening in the recent past,” says Srinivasan of ICRA.