A day after the Reserve Bank of India (RBI) raised the repo rate, Bank of Baroda (BoB) and ICICI Bank hiked their external benchmark-linked lending rates (EBLRs) by 40 basis points (bps) each.
BoB’s new repo linked lending rate is 6.9%, while ICICI Bank’s EBLR stands at 8.1%. Other major banks’ websites are yet to reflect their updated EBLRs. Kotak Mahindra Bank raised rates by up to 35 bps on retail deposits in some tenor buckets.
The repo rate hike has come as a relief for banks who were unable to raise rates for a portion of their books as they are linked to the repo rate. Spreads, too, can change only with a change in the risk profile of the borrower.
According to data from the Reserve Bank of India (RBI), the proportion of floating rate loans linked to external benchmarks stood at 39.2% in December 2021. Sixty nine percent of loans to micro, small and medium enterprises (MSMEs) and 58% of housing loans were linked to external benchmarks as of December 2021.
Banking sector analysts said the policy rate hike is a positive for banks, though it is not immediately clear how much it will help their margins, after accounting for the 50-bps hike in the cash reserve ratio (CRR).
While lending yields will rise due to the repo hike, the increase in CRR will have an adverse impact of 3 bps on margins for the banking system and will partially offset the improvement in margins, analysts at Motilal Oswal Financial Services said.
Kotak Institutional Equities said in a report that in the current environment, credit costs are benign and loan growth is still well below long-term trends. “In this environment, while the hike in repo rates gives a tailwind to NIM (net interest margin) outlook, we would want to be cautious and believe that a competitive environment would likely keep NIM stable or perhaps show pressure downwards.”
The brokerage believes public sector banks have better headroom to manage NIM pressure as they are growing at a slower pace, have healthy CASA ratios and low credit-deposit (CD) ratios.