Why Private Banks Are Raising Lending Charges: What You Need to Know

In March 2025, private banks increased lending rates despite a policy rate cut. The average lending rate touched 10.32%. 

Home loan borrowers and small business owners are now paying more. But what is making these banks hike their charges? This blog explains it all.

What’s Behind This Sudden Spike in Lending Rates?

Private banks are facing a cash crunch. The banking system's liquidity went negative. The daily liquidity deficit in March 2025 stood at ₹1,23,000 crore. That’s a big gap. Banks now need to pay higher interest to attract deposits, which makes loans expensive.

Also, deposit rates rose. The weighted average deposit rate went from 6.49% to 6.65%. This extra cost is passed on to borrowers. Even when the RBI cuts rates, banks won’t cut unless they can afford to.

Moreover, many banks are seeing more defaults in unsecured loans. To cover that risk, they increase lending charges, protecting their profit.

Let’s understand this better:

How Banks Cover Their Costs – And Why It Affects You?

Banks work like middlemen. They take money from depositors and give to borrowers. But when less money comes in, they raise deposit rates to attract funds. This is where the cost begins to rise.

Let’s say a bank gets a deposit at 6.65%. It then lends the money at 10.32%. The margin is how they earn. But admin costs, NPAs, credit risks also eat that margin.

Now, let’s add inflation. Inflation makes money worth less. Banks then need to offer higher returns to depositors; otherwise, people will move to mutual funds or gold.

So they’re stuck in a loop, more payout to depositors, more charge to borrowers.

Example:

If you take a personal loan of ₹50,00,000 at 10.32% for 5 years:

• EMI = ₹10,691
• Total repayment = ₹64,14,660

Now, if rate was 9.50%:

• EMI = ₹10,512
• Total repayment = ₹63,07,153

Difference = ₹1,07,507 over 5 years. That's real money.

What Makes Private Banks More Expensive Than PSU Banks?

Private banks have faster processing, better tech, and more aggressive lending. But they don’t get cheap capital like PSU banks.

Public-sector banks often receive government support, while private banks raise capital from the market and can't depend on budget support.

Also, private banks spend more on digital infra, staff, and marketing, which are added to your loan rate.

Let’s compare:

Private banks keep NPAs low but at a cost. They price loans for speed and risk.

Impact on Home Loans and Indian Borrowers

Home buyers are feeling the pinch. Loan EMIs have gone up. And with property prices already high, many families are delaying decisions.

EMI Difference Table:

The 1% difference costs ₹7,71,360 extra.

Also, prepayment becomes hard. Many want to close loans early, but high EMIs leave no savings.

Borrower Strategies To Beat High Lending Rates

You can still manage better. Here are tested strategies:

1. Balance Transfer

If your current bank charges high interest, move your loan to a lower-rate bank. Many banks offer a balance transfer at a lower rate of 0.5% to 1%.

2. Increase EMI When Income Grows

Small increases in EMI reduce total interest. Instead of tenure, cut the burden.

3. Opt for Floating Rate Loans

When the RBI cuts rates, floating rate loans fall. In the current cycle, this helps.

4. Use Loan EMI Calculators Regularly

Stay aware. Small interest hikes change long-term payments.

Why Banks Won’t Lower Rates Anytime Soon?

Liquidity remains low. Deposit growth is slow. Credit demand is rising. Banks need to protect margins.

Banks may not follow quickly even if the RBI cuts the repo rate again.

Also, global interest rates are still high. Banks raise money through bonds. If the cost stays high abroad, domestic rates won’t fall much.

Investors are also watching profit margins. No bank wants to post weak quarterly numbers.

Banks won't cut rates fast unless deposit inflows improve or defaults fall.

Conclusion

Private banks aren’t hiking rates just for profits,  they’re covering rising costs, managing risks, and balancing tight cash conditions. But borrowers shouldn’t sit quietly. You need to act smart. 

Review your loan terms, check your credit score, and push for better deals. In today’s lending game, staying passive is expensive. Don’t let rate hikes mess with your long-term goals. Make every rupee count, because the bank surely is.

FAQs

1. Why is my EMI not reducing even after the RBI cut rates?

Your bank may not have passed on the rate cut. It takes 2-3 months. You may also be on a fixed-rate loan.

2. Which banks have the lowest home loan interest rates now?

Some public banks still offer around 8% for salaried borrowers with good credit.

3. Can I reduce my EMI without paying extra?

Yes. You can ask to increase tenure. Or negotiate a rate with credit score proof.

4. Should I choose a private bank or PSU for home loan?

Private is fast but costly. PSU is slower but cheaper. Choose based on urgency.

5. How much can 0.5% hike in the loan rate cost me?

On ₹50,00,000 for 20 years, it adds around ₹3.83 lakh more.

Apply for Loans Fast and Hassle-Free

Apply Now

About the Author

LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?