With the Reserve Bank of India (RBI) on Wednesday hiking the repo rate by 50 basis points to 4.9% to tame inflation, banks and non-banking financial companies have now started raising their loan rates. While some rates are linked to the repo rates, others are linked to the lenders’ internal cost of funds. Some banks had raised their MCLR (marginal cost of funds-based rate) before the RBI’s announcement.
On Thursday, HDFC increased its retail prime lending rate (RPLR) on housing loans, to which its adjustable rate home loans (ARHL) are benchmarked, by 50 basis points, with effect from June 10. Home loan rates at the mortgage player now start 7.55% onwards.
ICICI Bank on Thursday raised its external benchmark lending rate by 50 bps to 8.6%, while Bank of Baroda has increased its repo linked lending rate (RLLR) to 7.4%. Punjab National Bank (PNB) also raised the RLLR to 7.4% with effect from June 9.
Bank of India jacked up the RLLR to 7.75%. RBL Bank has also raised its repo-linked lending rate by 50 bps to 10%, effective June 8. Another private sector lender, Federal Bank, has also factored in the increase in repo rate and increased the interest rates accordingly.
HDFC Bank recently raised its MCLR on loans across all tenures by 35 basis points, effective June 7. Earlier, it had raised the MCLR by 25 bps. ICICI Bank had raised its MCLR, effective June 1.
The rise in the RLLR will lead to an increase in equated monthly instalments (EMIs) on home, vehicle and other personal and corporate loans. The increase in EMI, along with possible subsequent rate hikes and the expected inflation (including food inflation), could visibly damage the cash flows of the borrower.
Other banks are set to increase their RLLR in the coming days. Banks are expected to jack up MCLR in the wake of the second repo rate hike in the last one-and-a-half months and the rise in cost of funds for banks.
Banks which are offering repo-linked lending rate will have to hike the interest rates by another 50 bps. As per an October 2019 circular from RBI, banks linked their retail loans to external benchmark lending rates (EBLR). As a result, most banks have adopted the repo rate as their benchmark. As banks borrow money from the RBI at the repo rate, any change in the repo rate affects the lending rate of banks.
MCLR-linked loans had the largest share (53.1%) of the loan portfolio of banks as of December 2021. The share of EBLR loans in total advances was 39.2% in December 2021, according to the RBI.
On May 4, the RBI jacked up the repo rate, the main policy rate, by 40 bps to 4.40% and the cash reserve ratio (CRR) by 50 bps to 4.50% to bring down the elevated inflation and tackle the impact of geopolitical tensions. Banks had then raised RLLR by 40 bps.
Analysts now expect another repo rate hike in the August monetary policy review.