Banks quietly tweak interest rates for auto and personal loans

Interest rates on certain retail loans hike auto and personal loans have begun to rise as several banks revise their marginal cost of lending rates (MCLR). This is despite RBI keeping its repo rate, the rate at which the Reserve Bank of India lends, unchanged since February 2023. For customers whose home loans are linked to the repo rate, there has been a change in their home loan EMIs. But other loans such as auto loans and personal loan lack such a connection with RBI repo rate. MCLR is the minimum interest rate a financial institution needs to charge for a specific loan. It dictates the lower limit of the interest rate for a loan.

SBI, initially offering auto loans at 8.65% until December, has now increased the starting rate to 8.85% for clients with high credit scores. Numerous banks have also raised their personal loan rates. Bank of Baroda, previously charging 8.7% on auto loans, now charges 8.8% and has reintroduced processing fees that were waived during festive months. Union Bank of India has similarly increased rates on auto loans and certain personal loans by adjusting the spread over the external benchmark, resulting in car loans starting at 9.15%, up from 8.75%.

IDFC First Bank raised interest rates on personal loans from 10.49% in November to 10.75%, while Karnataka Bank increased personal loan rates from 14.21% to 14.28% during the same period. A bank executive told Times of India that lenders delayed rate revisions in auto and personal loans until after the festival season due to increased fund costs from deposit rate adjustments and tightness in money markets.

Interestingly, Bank of Maharashtra reduced its home loan interest rate from 8.5% to 8.35% on January 3. A senior banker noted that this tactical move is because home loans are considered nearly risk-free, contributing to the bank’s deposit base as borrowers often open savings accounts with the lender.

Following SBI’s 50 basis points increase in deposit rates from December 27, other banks followed suit. This will raise their marginal cost of lending rate, a benchmark for commercial loans, subsequently increasing interest rates in this segment as well.

Indian banking system is facing a liquidity deficit for the past few months. Banking system liquidity deficit rose to 2.27 trillion rupees as of December 20, registering its highest level since April 1, 2016.