Loans to turn pricier as RBI hikes repo rate
MUMBAI: The days of lower interest rates are over, and loans will become dearer following the monetary policy committee’s decision on Wednesday to raise the policy repo rate by 40 basis points.
For floating rate loans linked to the repo rate, the transmission of the rate hike will be immediate, bankers said. Loans linked to other external benchmarks such as treasury bills will also get pricier, they added. For loans linked to the marginal cost of funds-based lending rate (MCLR), the respective asset liability committees of banks are expected to meet soon.
The Reserve Bank of India (RBI) has mandated banks to price loans to retail and small business customers based on external benchmarks, while corporate loans are primarily linked to the MCLR. Floating rate loans to individuals disbursed before October 2019 are mostly linked to MCLR, but banks allow customers to switch to external benchmarks for a fee.
“We will 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, State Bank of India (SBI), Bank of Baroda (BOB), Axis Bank and Kotak Mahindra Bank had hiked MCLR rates. The largest chunk of floating rate bank loans, at 53.1%, is linked to the MCLR, while 39.2% is linked to external benchmarks as of December 2021, according to data from the RBI.
The rate-setting panel of the RBI met out of turn on Monday and Wednesday to “reassess the evolving inflation-growth dynamics” and address the impact of the developments after its April meeting. The six members of the committee unanimously voted for a 40 basis points hike in repo rate.
Decadal-low interest rates were driving demand for mortgages but borrowers will now have to shell out more as RBI goes all out to tame inflation amid global headwinds.
Anuj Puri, chairman of real estate services company Anarock Group, said 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 India since the pandemic began.
“Positively, for us, a bulk of our book is floating-rate. Therefore, the ability to transmit the interest rates as central bank increases 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.
That said, customers will now be able to get better returns on bank deposits. More so, as the central bank is expected to further raise the repo rate this year. Banks have been raising deposit rates for a while, and a lending rate hike will bolster their margins.
For customers of non-bank financiers, rate hikes are not far away as the borrowing costs of these lenders will also increase.