Credit and Finance for MSMEs: The repo rate hike by the Reserve Bank of India (RBI) by 140 basis points (bps) since May this year will eventually increase the interest cost on MSME and personal loans by around Rs 1,957 per Rs 1 lakh loan in a year, said the latest SBI Ecowrap report authored by the bank’s Group Chief Economic Adviser Soumya Kanti Ghosh. Also, the demand of around Rs 50,000 crore may crash during an increasing rate scenario, Ghosh noted. As of December 2021, 39.2 per cent of bank loans were benchmarked to external benchmarks in comparison to 28.6 per cent in March 2021 and a mere 2.4% in September 2019, according to RBI.
The central bank had increased the repo rate by 0.4 per cent in May followed by 0.5 per cent each in June and August, taking the repurchase rate to 5.40 per cent so far. The rate hike by RBI is usually aimed at discouraging commercial banks from borrowing in order to narrow the supply of money in the economy and control inflation “amid deteriorating global economic and financial environment” RBI had said in its monetary policy statement in August.
Bank of Baroda chief economist Madan Sabnavis told FE Aspire (erstwhile Financial Express Online) that the borrowing cost will go up by a proportionate amount since most MSMEs aren’t benchmarked to the repo rate. “While those covered under the Emergency Credit Line Guarantee Scheme (ECLGS) would still get credit at the earlier rate but others are more likely to be affected by the repo rate hike because your cost would have gone up,” he said.
The Ecowrap report added that if there is an increase in the repo rate by even 60 bps, there would be around Rs 22,184 crore interest cost on MSME and retail customers (1 bps increase in repo rate will have a combined impact of around Rs 370 crore on borrowers), the report noted.
The increase is likely to be around the corner as according to the latest Bloomberg survey reported on Tuesday, economists see another hike in the repo rate by 35 bps in the September monetary policy review and a quarter-percentage point jump in December. This would take the rate to 6 per cent. “There will be a further rate hike. It is only guesswork now but I think we will end up at 5.9 per cent or 6 per cent,” said Sabnavis.