PSU Banks Loan Rates : After the meeting of the Reserve Bank of India's Monetary Policy Committee, public sector banks Bank of Baroda (BoB), Canara Bank and UCO Bank made their loans expensive. These banks announced an increase in their benchmark marginal cost of funds-based lending rates ( MCLR ). Bank of Baroda and Canara Bank have increased the base rate by 5 basis points for six-month and one-year tenures from August 12. UCO Bank has also increased its lending rates by 5 basis points from August 10.

What is MCLR

MCLR is the minimum rate at which a bank lends to customers. The cost of funds or deposits plays a major role in determining the MCLR for banks. Last month, Bank of India had raised its MCLR by 5 basis points for a one-year period from August 1, while State Bank of India had raised its MCLR by 5 to 10 basis points for all periods.

Increased cost of giving returns

Several public and private sector banks have increased MCLR to reflect the higher cost of deposits. HDFC Bank and IDFC First Bank raised MCLR by an average of 5 basis points in January.

Challenge to profits

According to rating agency Crisil, the cost of funds for banks is expected to rise by 25-30 bps in FY25 after a rise of about 140 basis points since the start of the interest rate tightening cycle in May 2022. The firm had said last month that higher deposit rates would challenge bank profitability in FY25.

Most banks saw a decline in deposit growth by an average of 1.15 per cent in the June quarter of FY 2025. Yes Bank's deposits fell by 0.75 per cent to Rs 2.64 lakh crore, while Bandhan Bank's deposits fell by 1.5 per cent to Rs 1.33 lakh crore.

Slow deposit rate became a tension

The high cost of deposits and the slow growth rate of deposits compared to loans have been a matter of concern for the RBI for the past one year. RBI Governor Shaktikanta Das said in his address after the monetary policy meeting that it has been observed that alternative investment avenues are becoming more attractive for retail customers and banks are facing challenges on the financing front, as bank deposits are lagging behind loan growth. Because of this, banks are resorting more to short-term, non-retail deposits and other instruments.