By Shashank Didmishe
Axis Bank on Wednesday announced a 35-bps increase in its marginal cost of funds based lending rates (MCLR). It is the second time in last two months that the lender has increased the MCLR. The bank will charge 7.75% for loans with one-year maturity, 7.85% for loans with two-year maturity and 7.90% for loans maturing in three years.
Earlier this month, the Reserve Bank of India raised the repo rate by 40 basis points to 4.4%. Since retail and SME loans are linked to the repo, banks raised interest rates on these products.
However, with the cost of deposits also rising, in the wake of rising credit demand, some banks, including State Bank of India (SBI), HDFC Bank and Bank of Baroda (BoB), have been increasing their MCLRs.
In fact, SBI raised its MCLR by 10 bps across tenures while BoB, Kotak Mahindra Bank and Axis Bank raised theirs by 5 bps in April before the repo rate hike. After the repo rate hike, HDFC Bank raised its MCLR by 25 bps and SBI raised the same by 10 bps effective May 15, taking the one-year MCLR to 7.2% and the two-year rate to 7.4%.
Given that the proportion of banking sector’s floating rate loans linked to the external benchmarks (EBR) has gone up to 39.2% in December 2021, from 28.6% in March 2021, the extent of transmission of the movements in interest rates would be higher than in the past. The proportion of loans linked to MCLR was down to 53% as of December 2021, from 77.7% in FY20 and a mere 5% of floating rate loans are linked to the base rate.
Bank credit witnessed a strong growth of 11.1% year-on-year, expanding by 537 bps for the fortnight ended April 22, 2022, up from 5.7% in the year-ago period (reported April 23, 2021). The growth was driven by the low base effect, retail loans and higher working capital requirements owing to elevated inflation. Retail growth has been picking up due to the improvement in the job market and economic activity. The total credit outstanding was as of April 22, 2022, was Rs 119.5 trillion, increasing by Rs 12 trillion over the last 12 months.