Banks Raise Loan Interest Rates, Even As Overall Lending Rates Are Stagnant; What Does It Mean For Customers?

In a move to manage liquidity and profitability, major banks have increased lending rates in July. The latest among them is HDFC Bank, which has increased loan interest rates by up to 10 basis points on overnight tenure from 8.95 per cent to 9.05 per cent. According to the Yes Bank website, the bank's overnight rate is 9.10 per cent. Its marginal cost of funds-based lending rates (MCLR) for one month is 9.45 per cent. MCLR is the minimum cost of lending rates beyond which banks are not permitted to lend.

While Canara Bank’s overnight rate is 8.20 per cent, its one-month rate is 8.30 per cent. Bank of Baroda’s overnight lending rate is 8.15 per cent, and its one-month rate is 8.35 per cent. According to the IDBI Bank website, the latest MCLR for overnight tenor is 8.40 per cent, while for one-month tenure its MCLR is 8.55 per cent. According to the PNB website, its overnight rate is 8.25 per cent, and the MCLR-based lending rate for one month is 8.30 per cent. Most of these rate hikes are effective from July 1 onwards.

Also Read: Home Loan: Key Factors To Consider Before Borrowing

According to experts, lending institutions and banks that have increased interest rates may have done so due to factors such as the rising cost of funds, credit risk, and liquidity positions. For instance, banks' source of funds has become more expensive. One of the sources of funds for banks is deposits, and to attract an inflow of funds, banks have had to increase interest rates on deposits. When the interest rates on deposits rise or the cost of borrowing from other sources increases, lenders often pass these costs onto borrowers through higher lending rates.

Says Atul Monga, co-founder and CEO, BASIC Home Loan: “There has been a stagnation in overall lending rates. Despite that, some Indian banks are raising their lending rates to manage liquidity and profitability. Certain factors such as higher operational expenses, increased cost of funds, effective regulatory changes, and even anticipated future hikes in rates – all have cumulatively contributed to this decision. A rise in inflation can also be attributed to the increased lending rates.”

According to Raoul Kapoor, Co-CEO, Andromeda Sales and Distribution, if banks perceive an increased risk in lending, they may raise rates to compensate for potential defaults. “This can happen due to economic uncertainties or sector-specific risks. Similarly, banks might adjust lending rates to manage their liquidity positions. If a bank needs to maintain higher liquidity, it may increase lending rates to discourage borrowing and conserve cash. Besides that, another factor behind the increase in interest rates could be the aim to maintain their profit margins. When operating costs increase or when there's a squeeze on margins due to competitive pressures, banks might raise lending rates to protect their profitability,” adds Kapoor.

What It Means For Customers: When it comes to increased lending rates, for customers it can have a different kind of impact. Increased lending rates imply much higher borrowing costs, gradually leading to more equated monthly installments (EMIs) costs for all kinds of loans including home, auto, and even personal. On the other hand, it can also negatively impact household costs like straining the domestic budget and possibly pulling the strings tighter on disposable income. While new borrowers may find home loans becoming less affordable, the existing ones might have to reconsider their financial budget or strategies to be able to accommodate an increased repayment burden.

“For customers, higher lending rates mean increased costs for borrowing, which can result in higher EMIs, impacting household budgets. This also affects the home loan eligibility of new borrowers. The higher the interest rate, the higher the EMI, and accordingly, loan eligibility will be impacted as it depends on the borrower’s income and EMI servicing capability,” adds Kapoor.