PSU Banks Pass on Higher Deposit Costs to Borrowers

12 Aug 2024 , 09:45 AM

A day after the Reserve Bank of India (RBI) published its monetary policy statement, public sector lenders Bank of Baroda (BoB), Canara Bank, and UCO Bank announced a rise in their benchmark marginal cost of fund-based lending rate (MCLR) on Sunday.

With effect from August 12, BoB and Canara Bank raised their loan rates by 5 basis points for six-month and one-year tenures. With effect from August 10, UCO Bank has also increased its lending rates by 5 basis points. 0.01 percentage points make up one bps.

The minimal rate that a bank will offer to a corporate loan customer is known as the MCLR. The cost of deposits or cash is a significant factor for banks when calculating the MCLR.

The State Bank of India raised its MCLR by 5 to 10 bps across tenures last month, while Bank of India boosted its MCLR by 5 bps for a one-year tenure starting on August 1.

Banks in both the public and private sectors have increased their MCLR rates in response to the increased cost of deposits. In January, MCLR increased by an average of 5 basis points at HDFC Bank and IDFC First Bank.

According to rating agency Crisil, the cost of financing for banks is predicted to increase by 25–30 bps in FY25, having increased by about 140 bps since the beginning of the rate tightening cycle in May 2022. The company stated last month that higher deposit rates will put bank profitability in jeopardy in FY25.

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