Private banks slower than public sector banks in raising interest rates

The hike in lending rates of all scheduled commercial banks on outstanding loans since May 2022 has been only 95 bps

The Reserve Bank of India (RBI) has raised the policy repo rate by 250 basis points (bps) in the last financial year. The repo rate was 4 per cent in May 2022 and it was subsequently raised to 6.5 per cent by February 2023.

However, private banks have been slower in hiking the interest rates on new loans as compared to public sector banks and foreign banks, according to a report in Businessline (BL).

“We had the leeway to absorb some of the costs as our yields are at least 100 bps higher than most PSU banks because of the advantage in our operational cost. That helped us absorb the repo hikes and not pass it on fully to borrowers,” a retail head of a private bank told BL.

According to the report, the hike in lending rates (weighted average lending rates) of all scheduled commercial banks on outstanding loans since May 2022 has been only 95 bps. However, the rates of fresh rupee loans have been increased by 173 basis points.

On the other hand, banks have been slow in rewarding savers. The overall deposit rates have increased just 99 basis points during the same period.

According to the report in BL, the disaggregated numbers of group-wise rise in lending rates show that the transmission has been poor in outstanding loans of private and public sector banks. The weighted average lending rates has risen by 00 bps for private banks and by 87 bps for public sector banks between May 2022 and February 2023. 

Public sector banks increased the WALR by 179 bps while private lenders have hiked it by 134 bps only for fresh rupee loans. 

“Only home loans largely adopt external benchmark rates linked to repo. For other retail products, we have the bandwidth to price it based on MCLR, where there are adjustments for costs including the cost of risk and, hence, the transmission was lower in the other products. Non-home loan retail portfolio of private banks is between 35 and 50 per cent,” CEO of a private bank told BL.