Faster credit growth pushes up lending rates

Lending rates are heading north as banks build a deposit base to meet rising credit demand. From April 1, the MCLR, which until now was pegged lower, and base rates have to be aligned with each other. This is forcing banks to raise MCLR, so that base rates do not soften the rates for too many loans in the system.

Rajnish Kumar, chairman, State Bank of India, told DNA Money, "Bank credit is picking up and the huge deposits that came into the banking system have now flown out. The deposit growth has also slowed down, so we have to build a deposit base to be prepared for the upswing in the demand for credit."

Last week three large lenders, State Bank of India, Punjab National bank and ICICI Bank, raised their marginal cost based lending rate (MCLR) by 0.10% to 0.20% across various tenures. The home loan and car loan rates of these banks have also gone up by 0.20% to 0.30%, depending on the quantum of the loan and the tenure of the loan. SBI's affordable home loan rates are up by 0.05%, while the rates in other categories of loans are up by about 0.20%.

It is the first hike in the one-year MCLR since the inception of the new lending rate system in April 2016, according to Thomson Reuters data.

ICICI Bank and Punjab National Bank raised their MCLR but by a slightly lower rate of 0.15%. Some lenders such as HDFC Bank, which have their one year MCLR at 8.20%, may review their rates this week. But SBI continues to be offering the lowest MCLR – rate to which most of the bank's loans are linked to – at 8.15%. ICICI Bank one year MCLR is at 8.30% and PNB the one year MCLR is at 8.30%.

Banks have another noose around their neck. From April 1, all the loans linked to the base rate will also be aligned to the MCLR, which is likely to make some older loans cheaper. Banks are quickly raising the MCLR so the base rate alignment does not impact their margins.

Deposits grew at the rate of 5.83% to Rs 11,349,038 crore until February 16, 2018, while the bank credit growth grew at 10.62% over the previous year to Rs 85,05,657 crore, according to the latest Reserve Bank of India (RBI) data.

The yields on the government bonds, which also signal the trajectory of lending rates, have also seen a sharp uptick.

"The yields on government bonds have also gone up by over 0.50% and the state government bonds now fetch 8.30%. So all these trends point towards a rise in lending rates," Kumar said.

He said bank credit is certainly picking up – but from the services sector and the personal loans segment like the unsecured credit, but broadly there is a momentum in the bank credit growth.

The minutes of the Monetary Policy Committee (MPC) released a fortnight after the policy on February 7 showed that most of the committee members were anxious about the challenges of inflation. The minutes of the MPC meeting show that one of the members, RBI executive director Micheal Patra, strongly recommended a rate hike on February 7. While Viral Acharya, deputy governor, RBI, also hinted at changing the neutral stance of the policy if the upside risks to inflation increase following the rise in oil and global commodity prices.