Public Sector Banks Increase MCLR Rates Due to Increased Deposit Costs

Several public sector banks, including Bank of Baroda, Canara Bank, and UCO Bank, have increased their benchmark marginal cost of funding-based lending rate (MCLR) following the Reserve Bank of India’s (RBI) recent monetary policy announcement.

The hike in MCLR, ranging from 5 to 10 basis points, reflects the higher cost of funds for banks due to increased deposit rates. This trend is evident across the banking sector, with both public and private sector banks adjusting their lending rates to align with the rising cost of funds.

Since May 2022, the RBI has consistently raised interest rates to combat inflation. This has led to a significant increase in banks’ cost of funds, which is passed on to borrowers through higher MCLR rates.

Despite these rate hikes, banks continue to face challenges in attracting deposits, as retail customers are increasingly exploring alternative investment options. This mismatch between deposit growth and credit demand has raised concerns for the RBI.

The higher cost of funds and slower deposit growth are expected to impact bank profitability in FY25. Rating agency Crisil has forecasted a potential increase in deposit costs by 25-30 basis points.

Overall, the banking sector is navigating a challenging environment with rising interest rates and competitive pressures. The ability of banks to effectively manage their funding costs and maintain profitability will be crucial in the coming months.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.