Private Banks Raise Lending Rates In March Despite RBI Rate Cut; Details Inside

Public sector banks made only a marginal move, increasing their lending rates by 2 basis points to 8.66 per cent. In contrast, private banks saw the steepest rise

This unexpected uptick in lending rates comes amid tightening liquidity conditions and elevated funding costs

Source : ABPLIVE AI

Private sector banks in India raised interest rates on fresh rupee loans in March 2025, even after the Reserve Bank of India (RBI) implemented a 25 basis point policy rate cut earlier that month. Latest RBI data shows that the average lending rate for fresh rupee loans by private banks rose to 10.32 per cent in March, marking a 12 basis point increase over February and the highest level in five months.

This unexpected uptick in lending rates comes amid tightening liquidity conditions and elevated funding costs. In March, private banks had to roll over their maturing certificates of deposit (CDs) and bulk deposits at higher rates, pushing up the cost of funds. The weighted average domestic term deposit rate (WADTDR) on fresh rupee deposits climbed to 6.65 per cent in March from 6.49 per cent in February, highlighting sustained pressure on banks’ liabilities.

Liquidity constraints were particularly severe during the month, with the banking system operating under a daily average deficit of Rs 1.23 lakh crore, according to RBI data. While the central bank injected funds to ease the crunch, surplus liquidity only materialized in the final days of the month, too late to enable banks to transmit the policy easing to borrowers.

Rate Cut Transmission

The rate cut’s transmission was uneven across banking categories. Foreign banks led the response by reducing their average lending rate by 24 basis points to 8.93 per cent in March. Public sector banks made only a marginal move, increasing their lending rates by 2 basis points to 8.66 per cent. In contrast, private banks saw the steepest rise, contributing to a growing spread of 166 basis points between private and public sector lending rates.

Industry leaders acknowledge the mounting challenges. "Loan spreads have remained compressed compared to bond spreads. Even when bond spreads move, loan spreads don't adjust accordingly; they're actually coming down," said Srinivasan Vaidyanathan, CFO of HDFC Bank, during a recent post-earnings analyst call, as per The Economic Times report.

"We are selective in our approach, if a loan meets our quality and pricing benchmarks, we go ahead; otherwise, we're comfortable letting it go. We're not chasing balance sheet growth at the expense of returns,” he added.

ICICI Bank's Group CFO Anindya Banerjee echoed similar sentiments, citing increased pricing pressure from well-capitalised competitors, the report added.