MUMBAI: With large sums raised under the dollar swap scheme on their books and deposit rates rising, banks have begun hiking lending rates for corporate and retail borrowers to protect their margins. Lenders face high carrying costs if they fail to deploy these funds profitably.
At least five major banks have raised lending rates by up to 25 basis points in recent weeks. The moves also follow the Reserve Bank of India’s rate signals last month. In October, the RBI raised its key lending rate by 25 basis points, marking the start of a rate-hiking cycle to fight inflation in Asia’s third-largest economy.
The banks that have raised rates include State Bank of India, Punjab National Bank, Bank of India, Indian Bank and HDFC Bank. The increases will push up EMIs for corporate and retail borrowers, including those with home and auto loans, and could slow loan growth in the coming months.
Recent deposit rate hikes may also have prompted lenders to raise lending rates to protect their margins, analysts said. The RBI typically seeks to curb demand by making borrowing more expensive.
Retail inflation rose above 6% in October, primarily driven by higher food prices.“Banks have raised MCLR rates following the rate hike by RBI. In rupee terms, we raised `24,000 crore,” said Pramod Dwivedi, executive director at Bank of India.
The funds helped the bank retire high-cost bulk deposits and protect its net interest margin by raising MCLR, he said. These deposits had been contracted at 7-8%.Banks had mobilised $132.98 billion through Foreign Currency Non-Resident Bank (FCNR(B)) deposits under a special window launched by the central bank in June to shore up the rupee.
The deposits were raised at around 6.25% for three-to-five-year tenures in US dollars, with rates varying across banks and deposit sizes. Higher lending rates can help banks offset the near-term negative carry on these deposits while repricing rupee loans. The funds can also be deployed in higher-yielding assets or used to retire expensive wholesale deposits. Banks appear to be taking a gradual rather than aggressive approach.
“Banks have used the funds raised to deploy in investments and to retire expensive wholesale deposits,” said Sachin Sachdeva, v-p and co-group head, Financial Sector Ratings, at ICRA.