Lending rates, EMI to increase further

Lending rates of banks, which have already risen due to expectations of policy tightening, could go up further due to Wednesday’s repo rate hike as well as sustained credit demand.

The Reserve Bank of India on Wednesday raised the repo rate by 25 basis points to 6.50 per cent, a second straight hike after the 25-bps increase in June.

This increase in repo rates will increase the bank’s cost of funds, which might force them to hike their MCLR.

Barely two days before the RBI policy, State Bank of India (SBI) had increased rates on its retail term deposits maturing in one year or more by 5-10 bps. Marginal cost of funds-based lending rates for banks have risen by 5-20 bps in the last two months, tracking the nearly 20-bps hike in deposits rates, especially on retail term liabilities.

Loan rates could increase gradually across banks because credit demand is strong and more durable, RBL Bank Executive Director Rajeev Ahuja said.

“The increase will depend on the liquidity conditions but it won't be more than 25-30 bps spread across three to four months. I think banks will continue to be aggressive in mobilising deposits to fund credit growth," Ahuja said. Adhil Shetty, CEO, BankBazaar.com said: “In June, several leading banks including SBI had increased their MCLR. With the rate hike, we’ll see loans get costlier.” For example, on a loan of Rs. 1 lakh for 20 years at an interest rate of 8.5 per cent, the EMI is Rs 868. If the rate rises to 8.75 per cent, the EMI increases to 884. If the interest rate reaches 9 per cent, the EMI becomes Rs 900.

“In a rising rate scenario, it makes immense sense for customers repaying loans to make periodic principal prepayments. This is especially helpful while you’re in the first half of your loan tenure. Pre-payments made in the first half have immense impact in reducing your long-term interest outgo and thus ensuring savings,” Shetty said.

After being in single digits for most part of 2017, credit growth in the banking system has picked up in recent months.