State Bank of India, the country’s biggest mass lender by assets, has raised its marginal cost of lending rate (MCLR) on all types of retail and institutional loans – for homes, vehicles or corporate purposes – by 10 basis points, marking the start to an upward cycle in borrowing costs in nearly three years. The lender has funded more than a fifth of all outstanding loans in the country.

One basis point is equivalent to a hundredth of a percentage point.

Almost all lenders are now likely to follow the SBI in raising their benchmark rates, with the Reserve Bank of India (RBI) likely tightening monetary conditions to restrain inflation. Banks and non-bank lenders have raised lending rates by up to 15 basis points over the past one month on tightening liquidity conditions and higher deposit costs.

Lending Rates Raised Again in Less than 6 Mths

More than 53% of all outstanding bank loans are linked to MCLR.

A note on the State Bank website said the one-year MCLR rate has been raised to 7.1% from 7%, effective April 15. The rates have been raised on tenors ranging from overnight borrowing to three-year loans. Nearly half of the lender’s portfolio is linked to MCLR and 22% to T-bills under the external benchmark linked rate (EBLR).

“Banks are going on the basis of their own assessment of the credit cycle picking up and the cost of funds. The lending rate revisions have come accordingly,” said Madan Sabnavis, chief economist, Bank of Baroda. “Going by the bond yields, we are definitely moving in the upward direction. It’s the case of banks not waiting for the RBI to raise the repo rate but doing something on their own.”

This is the second time in less than six months that the biggest government lender has raised lending rates. In December 2021, the lender had raised the base rate by 10 basis points. Earlier, Bank of Baroda had raised the MCLR by five basis points across tenors. For the lender, its one-year MCLR is now 7.35%. Private lender Kotak Mahindra Bank, too, raised its MCLR by five basis points across all tenors. Its one-year MCLR is now 7.4%.

Cost of Fresh Loans Up

To be sure, lending rates on outstanding loans have continued to dip, although the cost of fresh loans has increased, indicating that rates have bottomed out. “The recent spike in benchmark yields lays bare the growing disconnect and divergence between benchmark yields and bank lending rates, with banks entering a new territory where lending rates are now effectively lower than yields, thereby taking the sheen off risky lending for banks,” said Soumya Kanti Ghosh, group chief economic advisor, State Bank of India.

India’s benchmark 10-year bond yield recently spiked to its highest level in nearly three years to 7.19%, a tad higher than what banks are charging on loans.

In its latest monetary policy announcement, the RBI had signalled a clear intent to rein in surging prices. The central bank raised its FY23 inflation estimate by 120 basis points to 5.7% and lowered the growth projections.