HDFC Bank on January 8, 2023, announced an upward revision in its benchmark marginal cost of funds-based lending rates (MCLR), on various loan tenures. The new rates, effective from January 8, 2023, are poised to increase borrowing costs for every type of loan including auto and home loans.
HDFC Bank's MCLR Revision and Its Impact
MCLR is the minimum rate at which banks can lend and it follows an internal benchmark where banks set interest rates based on their cost of arranging funds for lending and also the repo rate. The interest rate on a loan is usually set at a fixed percentage above the MCLR, known as the "spread."
The HDFC Bank's MCLR currently ranges from 8.80 per cent to 9.30 per cent, across tenures. The overnight MCLR has risen by 10 bps to 8.80 per cent, while the one-month MCLR increased by 5 bps to 8.80 per cent. Furthermore, the three-month MCLR now stands at 9 per cent, after a 5 basis points hike. Also, the one-year MCLR, commonly linked to consumer loans, rose by 5 bps to 9.25 per cent.
Industry-Wide MCLR Adjustments and Why The Change?
HDFC Bank followed suit after several banks, including ICICI Bank, PNB, and Bank of India, raised MCLR rates due to a rise in the costs of deposits. ICICI Bank has hiked its one-year tenure MCLR to 9.10 per cent from 9 per cent, while PNB's one-year MCLR raised it to 8.70 per cent from 8.65 per cent. Even earlier on December 15, 2023, SBI had raised its MCLR by 5-10 basis points across various tenures. The rise in MCLR across banks is due to a broader trend reflecting the liquidity deficit in the Indian banking system.
Apart from the increased cost of deposits, RBI's recent report highlighted the banking system's liquidity deficit, which surged to 2.27 trillion rupees as of December 20, 2023, registering its highest level since April 1, 2016.
Base Rate or MCLR: Considerations for Borrowers
Loans availed on or after April 1, 2016, are automatically linked to MCLR. While the base rate remains unaffected by changes in the Repo rate, MCLR is responsive to repo rate fluctuations.
According to the HDFC Bank website, “The Reserve Bank of India (RBI) has made it clear that banks should allow base rate borrowers to switch to MCLR when there is a change in the policy rate. However, before you decide, you should seek professional guidance. Financial advisors can provide you with updated information and guide you through the process of transfer.
