Banks increase lending ratesClosely on the heels of a deposit rate hike by State Bank of India on 28th February, banks such as ICICI Bank and PNB have raised their one-year Marginal Cost of Lending Rate (MCLR) or benchmark rate. SBI has also hiked MCLR.

The consequence of this hike is that your home, car, education, personal and credit card loans are all set to get more costly with banks raising their lending rates. This is the first rate hike move since April 2016.

It is more a result of market rates tightening than RBI action. However, the central bank may follow suit. In its latest meeting, the RBI held its repo rate constant but one of the members of its rate-setting Monetary Policy Committee (MPC) voted for a rate hike. You can read more about it here.

Here is how the rate increases look:

Bank One year MCLR Hike
SBI 7.95 to 8.15
PNB 8.15 to 8.30
ICICI 8.2 to 8.3

Why is this happening?

Various factors such as increasing US rates, higher inflation and more government borrowing have resulted in higher interest rates in India’s government and corporate bond markets. The 10-year benchmark Government of India Bond yield has increased by more than 1% from 6.4% in August 2017 to around 7.74% at present. This rate hike by these banks only reiterates the prevailing conditions in the bond market. As mentioned above, the RBI stance also seems to be moving gradually towards rate increases.

What it means for you

Many loans are put onto ‘floating rates’ after a fixed period. For instance, your housing loan may have an interest rate of 9% in the first year, followed by a floating rate for the remaining 9 years. Once you are on a floating/variable rate, your rate will increase when the banks change its lending rate. However, the speed of this change depends on the ‘reset clause’ on your home loan. If you have an annual reset clause, the rate hike may not hit you for a whole year. If, however, you are a new borrower, the loan has become more expensive for you immediately.

The rate hikes will affect you as the interest rates costs on EMIs will go up. To get an idea of just how much for various interest rate scenarios, use our EMI calculator.

There is one silver lining to this. Deposit rates are also being raised, as we write here.

Author
Neil Borate

Neil Borate is Deputy Editor, RupeeIQ. He can be contacted at neil@rupeeiq.com.