Country's largest lender State Bank of India on Thursday raised the marginal cost of funds -based lending rate (MCLR) for one year by 20 basis points to 8.15 per cent from 7.95 per cent.
One basis point is one-hundredth of a percentage point.
The new MCLR or the minimum lending rate will be effective from March 1, 2018. The hike in lending interest rates comes a day after SBI hiked deposit rates across maturities.
It raised MCLR rate for loans for other tenors too. The maximum rise has been of 25 bps for loans up to maturity of three years.
MCLR includes marginal cost of funds, negative carry due to CRR (cost that banks incur on keeping funds with the RBI as CRR), operating costs and tenure premium (costs arising from loan commitments with a longer tenor). The final lending rate charged to a customer may include spread (a premium) to the MCLR.
This is the first time a bank has raised the benchmark lending rate after the MCLR system came into effect in April 2016. The MCLR system replaced the base rate from April 1, 2016.
So loans availed before April 1, 2016 will be covered under base rate. Base rate is the minimum rate set by the Reserve Bank of India below which banks are not allowed to lend.
MCLR is seen to be lower by 5 to 10 basis points when compared to the base rate. All new floating loans rates are linked to the MCLR regime.
The hike in key lending rate is likely to raise cost of car and home loans for the common man.
With SBI raising MCLR, other banks are likely to follow suit.
We decode why interest rates are likely to rise in the near future.
NPAs eroding profitabilityBanks are likely to raise interest rates to increase their profitability. Indian banks reeling under gross non-performing assets worth Rs 7.34 lakh crore by the end of second quarter this fiscal have been asked by the RBI to raise provisioning on the loans.
A rise in provisioning (keeping aside more funds in books for bad debts) leads to a fall in profits of banks. Provision for bad debts is treated as an expense in the books of accounts.
The banks have no option but to raise lending rates to insulate their profitability against the provisioning of bad loans.
Banks usually raise lending rates in tandem with a rise in deposit rates. A hike in deposit rates results in a rise in expenses for banks, thus raising cost of funds for them. A hike in lending rate leads to an increase in their income.
On Wednesday, SBI raised rates on deposits maturing in one year to less than two years by 15 bps to 6.40% from 6.25% earlier. Today, MCLR for one year maturity has been raised by 20 basis points to 8.15 per cent from 7.95 per cent.
One-year MCLR rate is greater than the deposit rates for similar duration.
Hence, MCLR rate always includes deposit rate plus Cash Reserve Ratio (CRR) plus operation cost plus tenor premium.
Rising bond yieldsAnother reason why lending rates are likely to rise is the increase in bond yields of the Indian government. The 10 year bond yield currently stands at 7.74% compared to 6.50 percent as on July 2017, up 124 basis points.
Banks bear the burden of high bond yields, which leads to a fall in their profitability.
"This will lead to a considerable fall in the banks' treasury income in the March quarter, with a spillover effect in FY19. We expect banks' profitability to be affected to the tune of Rs 30,500 crore in FY18, with return on assets of around 30 basis points," an India Ratings report on February 13, 2018 warned. Large losses emanating out of the quick rise in bond yields, especially in the past six weeks, will result in large mark-to-market losses on lenders' non held-to-maturity investment holdings.
According to the report, with a recovery in demand for bank credit, banks with better capitalisation may raise lending rates to improve net interest margins.
In the previous fiscal, banks collectively reported a gain on treasury of Rs 59,800 crore in FY17.