MUMBAI : State Bank of India (SBI) has raised loan rates for corporates and some retail borrowers by 10 basis points, setting the stage for a wave of rate hikes across the banking sector. The rate hike, the first from India’s largest lender in more than three years, indicates the turn in the interest rate cycle, as rising inflation prompts central banks to exit easy money policies.
Since its last interest rate hike in December 2018, SBI has steadily brought down its marginal cost of funds-based lending rate (MCLR) till June 2020. Its one-year MCLR, linked to this benchmark, now stands at 7.1%.
“We have been increasing our deposit rates over time, and margins have been under pressure. The rate hike is to negate that effect to an extent, although we still have a long way to go if we have to maintain margins," an SBI official said on condition of anonymity.
State-run Bank of Baroda and private lender Axis Bank have also reset their MCLR rates higher by 5 bps each, and experts said more would follow suit. The new rates at BoB, SBI and Axis took effect from 12 April, 15 April and 18 April, respectively.
Though the Reserve Bank of India (RBI) has mandated banks to price loans to retail and small business customers based on an external benchmark, corporate loans are still primarily linked to MCLR. Floating rate loans to individuals before October 2019 are also on MCLR, although banks allow switching to external benchmarks for a fee.
The largest chunk of all floating-rate bank loans, at 53.1%, was on MCLR, while 39.2% was linked to external benchmarks as of December last year, showed data from RBI. At SBI, more loans are linked to external benchmarks than MCLR. The SBI official cited above said about 42% of the bank’s loans are linked to MCLR, lower than the industry average.
“This could definitely be called the beginning of lending rate hikes," said Madan Sabnavis, chief economist, BoB.
At the end of the day, all rates are in some way linked to the policy rate and sovereign bond yields, Sabnavis said. “While RBI has not changed the repo rate for some time now, the market is moving in the other direction, and a correction is thus taking place in bank lending rates. Banks have been revising deposit rates, too, over time in various buckets, although it was not broad-based across lenders," he added.
So far in FY23, the yield on the 10-year government bond has hardened 31 basis points (bps) to 7.15%. It crossed the 7% mark after the monetary policy committee’s (MPC) 8 April announcement on withdrawing the accommodative stance.
The hike in lending rates is in sync with expectations of repo rate hikes beginning in June. Soumya Kanti Ghosh, chief economic adviser, SBI, said he expects a 25-bps rate hike each in June and August, with a cumulative rate hike of 75 basis points in the cycle. Experts are also pencilling in a further rise in bond yields over rising inflation and the central bank’s intent to withdraw excess liquidity gradually.
“We may see the 10-year government bond yield rising to 7.3%-7.5% in the coming months as the supply pressure kicks in. Expectations of RBI support will continue to put a cap on the long-term bond yields beyond that level," said Pankaj Pathak, fund manager (fixed income), Quantum Mutual Fund.
RBI’s ultra-accommodative monetary policy that ensured abundant system liquidity had led to fierce competition among banks at the cost of margins.
