Few banks increase MCLR to transmit repo rate hike, rising cost of deposits

MCLR

Few banks have increased their marginal cost of funds-based lending rates (MCLR) in September in response to Reserve Bank of India (RBI)'s transmit rate hike of 250 basis points (bps) and rising cost of deposit amid lagging deposit growth.

The State Bank of India increased MCLR by 10 bps across tenures, HDFC Bank increased three-month MCLR by 5 bps, and Punjab National Bank hiked MCLR by 5 bps between one month and three years, according to their websites.

One basis point is one hundredth of percentage point.

“The cost of deposit is rising for some time and as the older deposits get mature which was at lower rates, are now getting replaced by high rate deposits because of this banks are increasing the MCLR rates,” said Sanjay Agarwal, Senior Director, CARE Ratings.

In response to the 250 bps policy rate hike since May 2022, schedule commercial banks (SCBs) have revised their repo-linked external benchmark-based lending rates (EBLRs) upwards by a similar magnitude.

The one-year median marginal cost of funds-based rate (MCLR) of SCBs increased by 170 bps during May 2022 to July 2024. Consequently, weighted average lending rates (WALRs) on fresh and outstanding rupee loans increased by 181 bps and 119 bps, respectively, during May 2022 to June 2024, RBI said.

The weighted average domestic term deposit rates (WADTDRs), which include retail and bulk deposits, on fresh and outstanding deposits increased by 243 bps and 188 bps, respectively, during the same period, the RBI report said.

As there is a lag in deposit growth, banks have been increasingly switching to alternative funding sources such as commercial paper and certificates of deposit.

According to the RBI’s August bulletin, certificates of deposit issuances amounted to Rs 3.49 lakh crore during 2024-25 (up to August 9), a significant increase from Rs 1.89 lakh crore in the same period the previous year.

Commercial paper issuances also rose to Rs 4.86 lakh crore during 2024-25 (up to July 31), driven by higher borrowings from non-banking financial companies (NBFCs).

RBI Governor Shaktikanta Das expressed concern over the trend of household savings shifting towards alternative investment avenues, urging banks to leverage their extensive branch networks to offer innovative products and services to attract deposits.