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Banks take a cue from RBI, hike lending rates

ICICI Bank, , and are among the leading local lenders that Thursday raised their external reference benchmarks, used largely for pricing retail loans, a day after the Reserve Bank of India increased its key rate for the second time in as many months to restrain inflation. About half of the country’s outstanding banking credit is linked to external rates.

These banks raised their respective external benchmark lending rates (EBLR) by 50 basis points (bps), matching the latest increase in the repo, or the rate at which RBI lends short-term funds to commercial banks. One basis point is 0.01 percentage point.

ICICI Bank’s EBLR now stands at 8.6%, up from 8.1% before. ,

External Benchmark Lending Rate (I-EBLR) is referenced to the RBI policy repo rate, with a mark-up over the repo rate,” the bank said on its web site.

Retail Loans Linked to EBLR

Public sector lender Bank of Baroda said its EBLR rate now stands at 7.4%, effective June 9.

“Just like they had declined sharply, rates will normalize in a similar manner,” said Sanjiv Chadha, MD, Bank of Baroda. “EBLR-linked loans are 30-35% of our portfolio.”

At Bank of Baroda, about 40% of the loans are linked to an internal reference gauge, or the marginal cost of funds-based lending rate (MCLR). “In MCLR, the increase will be more gradual because it is linked to the deposit costs, which will rise depending on how the liquidity situation moves,” said Chadha.

All banks will automatically pass on the entire repo rate increase to customers that borrowed funds linked to external benchmarks. In the case of loans priced on MCLR or a ‘fixed’ rate, the asset liability committees of the respective banks are expected to decide on the quantum of increase in loan costs.

More than 40% of all outstanding bank loans are linked to the EBLR currently, and another 30% are linked to MCLR. The remaining are fixed-rate loans. All fresh retail and MSME loans are linked to EBLR, while corporate loans are linked to MCLR.

Public sector lender Punjab National Bank said its repo-linked lending rate will be 7.4%, effective June 9. Bank of India also revised its rates 50 bps higher to 7.75%. The Central Bank and

too, raised their EBLRs.


announced a rise in its interest rates on savings accounts and fixed deposits. Daily balances in savings accounts above Rs 50 lakh will earn 50 basis points higher – or 4%.

Rates on fixed deposits have been increased in the range of 10 to 25 basis points. mortgage lender

too announced an increase in its retail prime lending rate (RPLR) on housing loans by 50 basis points with effect from June 10. Its home loans now start from 7.55%.

Immediate Transmission

“EBLR will move in tandem with the entire regulatory movement. Since retail loans are linked to EBLR, the transmission will happen,” said Shanti Ekambaram, Group President – Consumer Banking, Kotak Mahindra Bank. “It’s clear that we will see another few rounds of rate hikes, which could take the repo rate to 5.5%-6%. The market rates have gone up much sharper; so we felt that our savers should also get reasonable returns.”

On Tuesday, private lender

increased its MCLR by 35 basis points across loan tenors, making loans expensive for existing borrowers. The new MCLR will now range between 7.5% and 8.05%. The one-year MCLR rate stands at 7.85%.

The bank had earlier raised MCLR by 25 basis points on May 7 after the central bank had raised the repo by 40 bps in an unscheduled rate action.

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