The ICICI Bank raised its marginal cost of funds-based lending rates (MCLRs) by 15-25 basis points (bps) across tenures, following a similar move by larger rival State Bank of India (SBI). The one-month MCLR at ICICI Bank now stands at 8.55%, 15 bps higher than earlier, and 10 bps more than the corresponding rate at SBI.
ICICI Bank, the country’s third-largest lender by assets, has raised its one-year MCLR by 35 bps since the beginning of 2018, while for SBI the rise has been 50 bps. The Reserve Bank of India (RBI) has hiked the repo rate by 50 bps over the same period to 6.5%.
Experts say the aggressive rate hikes by banks indicate the impact of a risse in their cost of funds as well as the continuing impact of bad loans sitting in banks’ books.
Karthik Srinivasan, senior vice president, Icra, said earlier rate increases by banks had been gradual and that might be changing now. “The rates have gone up in the last couple of quarters and the incremental hikes they have been doing has been in small bits and pieces. Now it’s been some time since they’ve raised their deposit rates and they are feeling the pinch now. Also, the NPA (non-performing asset) levels still remain high and resolutions are happening at a slow pace. So the hikes are a way to protect interest margins.”
Banks may also be expecting another hike in the repo rate in 2018 and are, therefore, passing on the earlier hikes to borrowers.
In its annual report for FY18, the central bank observed that transmission of rate changes has been slower during the year than in FY17. “…the transmission from the policy repo rate to deposit and lending rates on fresh rupee loans slowed down during 2017-18 in comparison with the previous year, mainly due to deceleration in deposit growth and a modest revival in credit demand,” RBI said.
Following the policy rate hike of 25 bps on June 6, 2018, the median term deposit rate and one-year MCLR increased by five bps and three bps, respectively. The weighted average lending rate (WALR) on fresh rupee loans also increased by eight bps in June, RBI added.