Loan Rates 2025: India’s banking sector is witnessing a fresh round of loan rate hardening, signaling a cautious shift in lending behavior. While public sector banks (PSBs) are leading this repricing wave, private lenders are also revising rates selectively to maintain profitability and manage funding costs.
After months of steady borrowing conditions, this move reflects banks’ effort to safeguard margins amid changing interest rate dynamics and tight liquidity in the market.
Loan and Deposit Rate Trends
Recent data shows a contrasting trend between existing and fresh loans. The average lending rate on new rupee loans rose from 8.62% in June to 8.80% in July 2025. Meanwhile, rates on outstanding loans continued to fall, from 9.67% in May to 9.38% in July.
| Category | May 2025 | July 2025 | Trend |
|---|---|---|---|
| Weighted Avg. Lending Rate (Outstanding Loans) | 9.67% | 9.38% | Down |
| Weighted Avg. Lending Rate (Fresh Loans) | 8.62% | 8.80% | Rising |
| Weighted Avg. Deposit Rate (Fresh Deposits) | 6.11% | 5.61% | Slow Fall |
| MCLR (Marginal Cost of Lending Rate) | 8.75% | 8.60% (Aug 2025) | Down 15 bps |
This divergence between lending and deposit rates shows that while borrowing is getting costlier, banks are reluctant to cut deposit rates aggressively—aiming to keep funding stable.
Why Are Loan Rates Rising?
According to Karthik Srinivasan, Group Head, Financial Services Ratings at ICRA, “Retail lending rates have come down with repo cuts, but deposit costs haven’t fallen as sharply. To protect margins, banks are widening spreads on new loans.”
Simply put, even though RBI’s repo rate reductions made older loans cheaper, banks are now increasing mark-ups on new credit disbursements to offset higher funding costs.
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Public vs Private Banks: Two Different Strategies
Public sector banks have been more aggressive in revising rates, while private banks are being selective—repricing loans based on borrower risk and market conditions.
| Bank Type | Approach | Objective |
|---|---|---|
| Public Sector Banks (PSBs) | Across-the-board repricing | Across-the-board repricing To counter higher funding costs |
| Private Banks | Selective adjustments | To maintain profitability and quality borrowers |
This strategy allows PSBs to manage liquidity pressure, while private banks focus on premium customers and risk-adjusted returns.
Experts Weigh In
Sanjay Agrawal, Senior Director at CareEdge Ratings, noted: “Banks are charging higher rates to new customers to protect margins. The transmission of rate cuts has been uneven—loan rates fell faster than deposits, creating a need to rebalance.”
He also added that this trend extends beyond housing loans to auto, personal, and MSME loans. It may continue for at least six months until liquidity conditions improve. A senior banker from a PSB added that higher borrowing costs now act as a filter for serious borrowers, helping reduce bad loan risks and improving credit quality.
Market Outlook
Despite the increase in loan rates, analysts expect banks’ net interest margins (NIMs) to remain stable. Srinivasan of ICRA noted that while Q2 margins may be the lowest, deposit cost benefits will begin to show in coming quarters. Unless liquidity improves sharply, banks are likely to maintain higher lending spreads, balancing credit growth with risk control.
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Conclusion on Loan Rates 2025
The hardening of fresh loan rates marks a careful recalibration in India’s banking system. As both public and private lenders adjust pricing strategies, borrowers should prepare for a period of elevated loan costs. While this phase may tighten affordability in the short term, it ensures financial stability and disciplined lending—a necessary step in today’s evolving credit environment.