Loans to turn pricier as RBI hikes repo rate
MUMBAI: The days of cheap credit are all but over and lending rates are set to rise following the monetary policy committee’s (MPC’s) decision on Wednesday to raise the policy repo rate by 40 basis points (bps).
For floating rate loans linked to the repo rate, the transmission of the repo rate hike would be immediate, bankers said. Loans linked to other external benchmarks such as the treasury bills would also be repriced, they said. For loans linked to the marginal cost of funds- based lending rate (MCLR), the respective asset liability committee of each lender would soon meet.
The Reserve Bank of India (RBI) has mandated banks to price loans to retail and small business customers based on an external benchmark. However, corporate loans are still primarily linked to MCLR. Floating rate loans to individuals given before October 2019 are also on MCLR, though banks allow switching to external benchmarks for a fee.
“We would now send a communication to customers giving them an option to either pay higher equated monthly instalments (EMIs) or increase the tenure, if there is space available. The rate hikes would be effective from the next payable EMI,” said a senior private sector banker.
Last month, a clutch of banks including State Bank of India (SBI), Bank of Baroda (BoB), Axis Bank and Kotak Mahindra Bank hiked MCLR rates. The largest chunk of all floating rate bank loans, at 53.1%, are on MCLR, while 39.2% are linked to external benchmarks as of December last year, showed data from RBI.
The rate-setting panel of the RBI met out of turn on Monday and Wednesday to “reassess the evolving inflation- growth dynamics” and the impact of the developments after its previous meeting in April. All six members of the committee voted for a 40 bps hike in repo rate.
Decadal-low interest rates have been driving demand for mortgages and borrowers would now have to shell out more as the RBI goes all out to tame inflation amid global headwinds. Unfortunately, for home buyers, this hike signals an imminent end to the all-time low interest regime, which has been one of the major drivers behind home sales across the country since the pandemic began, said Anuj Puri, chairman of real estate services company Anarock Group.
“Positively for us, a bulk of our book is floating-rate. Therefore, the ability to transmit the interest rates is very much inherent in our loan book,” Uday Kotak, managing director and chief executive, Kotak Mahindra Bank said after announcing its Q4 results on Wednesday.