State Bank of India (SBI), country’s largest lender, has hiked marginal cost of fund-based lending rate (MCLR) for three tenors by 5 basis points, with effect from Friday. As per the revised rates, bank’s three-month MCLR is increased from 8.50% to 8.55%, the six-month MCLR from 8.85% to 8.90%, and the one-year MCLR from 8.95% to 9%. This hike in MCLR, the third such increase in the last three months, will make loans and equated monthly installments (EMIs) costlier for its customers.
Currently 42 % of the bank’s loan book is linked to the MCLR, while the rest is external benchmark-based. According to officials from SBI, the increase in rates is part of an effort to pass on the higher cost of funds to borrowers, thereby helping to safeguard profit margins.
“The rate hike is intended to offset higher funding costs. This will help protect profit margins,” said a senior official of SBI.
The revision in MCLR reflects the changes in cost of funds. In a bid to mobilise low cost deposits, banks have hiked deposit rates to attract depositors. The fierce competition among banks by raising deposit rates has increased its cost of funds for lenders.
Impacted by the rising cost of funds other lenders have also increased MCLR in the past. HDFC Bank, the largest private sector bank, had hiked the three-month MCLR by 5 basis points in September. Punjab National Bank had also hiked MCLR by 5 bps between one month and three years in August.
Introduced on April 1, 2016, MCLR is the minimum interest rates below which banks cannot lend. It reflects the trends in banks’ cost of borrowing. In 2019, the RBI introduced the external benchmark linked rate (EBLR), which is linked to the repo rate, to further increase the pace of monetary policy transmission.
Currently, all the retail loans are linked to EBLR. While any hike or cut in the repo rate gets immediately reflected in loans linked to EBLR, banks review interest rates under MCLR regime every month at a pre-announced date. According to the latest data from the RBI, the median one-year MCLR for all scheduled commercial banks (SCBs) was steady at 8.95% in October 2024.