Banks expect a steady rise in lending rates across segments following the monetary policy committee’s (MPC) move to hike the repo rate as well as the cash reserve ratio (CRR) on Wednesday. While loans to retail and micro, small and medium enterprises (MSME) linked to the repo rate will turn more expensive with immediate effect, corporate loans will take a month or so to get repriced.
Housing loans are the main category where interest rates will automatically rise by 40 basis points (bps), following an equivalent hike in the repo. Some banks have home loans linked to the three-month T-bill rate, and such loans could see rates inch up, too.
As for corporate loans linked to the marginal cost of funds-based lending rate (MCLR), each bank will take a call after a meeting of its asset-liability committee (ALCO). Bankers were enthused by the rate hike as they expect it to improve pricing power and margins, though the CRR hike dampened the mood somewhat.
“If there had only been a 40-bps repo rate hike, that would have been even better as it would give a straight boost to our margins. With the CRR hike, we will now have to calculate how much the net benefit is,” a senior executive with a mid-sized private bank said.
Bankers have often spoken of the anomaly of the benchmark government security trading at 7.2% while most mortgage borrowers shelled out less than 7%. Even some corporate loans have been priced below the sovereign rate in recent months.
The CRR hike is set to change all that. Vishal Amarnani, head of fixed income, Emkay Wealth Management, said: “By hiking the CRR, RBI is forcing the banking system to hold additional liquidity in reserves rather than lending it at lower rates to businesses.” As liquidity worth Rs 87,000 crore gets withdrawn from May 21, the cost of funds for borrowers is set to rise.
In April, State Bank of India (SBI) had hiked MCLRs across tenures by 10 bps, while Bank of Baroda, Axis Bank and Kotak Mahindra Bank raised rates by 5 bps each. With the MPC’s latest action, MCLRs may see another round of hikes over the next one month. Thereafter, bank deposit rates may rise by about 100 bps over two to three months.
Uday Kotak, MD & CEO, Kotak Mahindra Bank, said that the bank’s ability to pass on the higher rates to borrowers will not affect its growth momentum. “Positively for us, a bulk of our book is floating-rate. Therefore, the ability to transmit the interest rates as the central bank increases is very much inherent in our loan book,” he said.
Customers of non-banking financial companies (NBFCs) will also see borrowing costs rise, but that will take effect with a lag. Umesh Revankar, VC & MD, Shriram Transport Finance, told FE that the impact on the company’s borrowing cost may only be to the extent of 20% as 80% of its borrowings are fixed-rate.
“As for end consumers, we are reasonably confident of being able to pass on 30-40 bps of rate hikes as we are in niche segments of retail lending, as long as the economic recovery remains strong. Through the NBFC channel, the rate hike may take two to three months to be passed on to the borrower,” Revankar said.