Banks marginal cost of funds based lending rate (MCLR) rate below which the banks cannot lend has seen an upward spike over the past months with banks such as HDFC Bank, ICICI Bank and SBI hiking their short- and long-term lending rates, amid slower deposit growth.
The growth in non-food bank credit rose 15.10% year-on-year (y-o-y) during the fortnight ended December 21, from 15.07% in the previous fortnight. On the other hand, deposit growth over the past many months has been growing slowly; deposits with the banking system grew 9.2% y-o-y to `118.12 lakh crore as on December 21 compared to a deposit growth of 9.7% in the previous fortnight. As a consequence, banks have been raising both deposit rates and loan rates.
However, Yes Bank slashed its MCLR by 5 bps to 8.90% and 9.55% for the one and three month tenures effective from January 1. The bank has slashed its rates following consecutive hikes in rates for the past five months since August 2018 for its short- and long-term tenures.
SBI hiked its fixed deposit rates up to one crore for the one- to two-year tenor by 10 bps to 6.8% as on September 28. Bank credit growth for CY18 has been higher when compared with that a year ago and has surpassed deposit growth. On a year-on-year basis, the bank credit growth as on December 7, 2018 was at 15.1%, while deposit growth stood at 9.7%. The lower deposit growth amid higher credit growth has been a factor contributing to the liquidity constraints in the banking system, said analysts at Care ratings.
Industry experts have been pointing out that banks spreads on loans over deposits have expanded to a two-year high of 3.4%, led by an improvement in the current account savings account (CASA) ratio.
Top banks including SBI, HDFC Bank and ICICI Bank have hiked MCLR by 5-10 basis points in December. ICICI bank and PNB left its MCLR rates unchanged as on January 1 2019.
According to a senior SBI executive, The current market does not necessarily call for an MCLR hike, but since we plan to make the deposit rates competitive and MCLR is based on incremental cost of funds, we had to raise it.
The executive added the primary aim of the decision is to compete with the private banks as they have been hiking deposit rates lately. Banks have been compelled to raise lending rates since deposits are growing at a much slower pace than non-food credit.