Private sector lender DCB Bank has announced an increase in marginal cost of funds-based lending rate (MCLR) by 10 basis points across different tenors from September 5 i.e. today. As a result, the equated monthly installments (EMIs) will get expensive for those who avail loans benchmarked against the MCLR.
What is the increase?
The overnight MCLR has been hiked to 8.72 percent. For one month, it has been raised to 8.72 percent. The interest rate on six month MCLR rate has been hiked to 9.62 percent. The one year MCLR rate has been raised to 9.67 percent
As mentioned, EMIs will get expensive for those who take loans against the MCLR. There is a reset-period for MCLR based loans, after which the rates get revised for the borrower.
Why are banks raising rates?
Along with DCB, other banks are also raising lending rates.
This decision comes in the wake of Reserve Bank of India (RBI) increasing benchmark policy rates by 50 bps last month to tame headline inflation. With this repo rate hike and two previous increases, the overall lending rates have surged by at least 190 basis points, or 1.9 percent.
Why are loans impacted by RBI's decision?
Generally, when
RBI hikes the repo rate, it increases the cost of funds for banks. This means that banks will have to pay more for the money they borrow from RBI. Consequently, banks pass on the cost to borrowers by increasing their loan interest rates, making EMIs costlier.
