RBI rate hike may impact bank credit growth, say analysts

Bank credit growth is likely to get affected in the near future as loans get costlier following the increase in the Reserve Bank of India’s key lending rate, analysts said.

Banks have started passing on the higher rates to borrowers, making home and auto loans costlier.

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The RBI increased the repo rate by 40 basis points to 4.4 percent and the cash reserve ratio by 50 basis points to 4.5 percent in a surprise decision on May 4 amid inflationary pressure. One basis point is one-hundredth of a percentage point.

Bank credit growth had picked up in the recent past. Credit growth stood at 11.2 percent on April 8 as compared to 5.3 percent in April 2021. With interest rates going up, this momentum may get impacted, analysts said.

“Over the medium term, inflationary pressures, supply chain disruptions and weak consumption demand could upset the current revival in credit growth,” analysts at India Ratings and Research said.

The higher interest cost will percolate to consumers in the form of more expensive mortgages, credit card and other loans, according to Madan Sabnavis, chief economist of Bank of Baroda.

“The rate for a 30-year fixed-rate mortgage averaged 5.1 percent in the week ending April 28. That’s up sharply from under 3 percent in November,” Sabnavis added.

What should borrowers do?

Analysts said borrowers are likely to face the heat as they expect the RBI to increase rates further.

“We expect three more rate hikes in this fiscal by the RBI now with the repo rate likely to end the year at 5.15 per cent,” HDFC Bank said in a research report.

In the backdrop of higher rates, borrowers should prepare well, analysts said.

“The RBI may not increase it at one go, but slowly and gradually, the rate will be increasing. Borrowers need to be more calculative, keeping in mind that the rate may eventually go up by 100 basis points or more over a period of time,” said Karan Gupta, director of India Ratings and Research.

If the RBI increases the rate by 150 basis points, the increase in monthly instalments for borrowers may go up by more than 9 per cent for loans of 15 years, according to data published by India Ratings on May 6.

Analysts also pointed out that higher interest rates could affect home loans by a bigger margin.

Almost half of the personal loans disbursed by banks were home loans at the end of FY22, according to RBI data. In March 2022, of almost Rs 33 lakh crore disbursed by banks, home loans accounted for more than Rs 15 lakh crore.

The data showed that home loans grew by about 7 percent in FY22, with priority sector housing growth being largely stagnant.

The increase in monthly loan instalments, along with possible further rate hikes and expected inflation (including higher food prices), could damage the cashflows of borrowers, said analysts.

“Housing prices are going up and lending towards the housing sector is likely to be affected. Due to inflation, even construction costs are going up,” said G Chokkalingam, founder of Equinomics Research & Advisory. “While the impact may be marginal in all other segments, the housing segment will be affected in all aspects.”

After the RBI’s decisions, ICICI Bank, Bank of Baroda, HDFC Bank, Punjab National Bank, Indian Bank and Kotak Mahindra Bank have increased their lending rates.

While the public service banks have increased the rate by 40 basis points or 0.4 per cent, Kotak Mahindra raised it by 50 basis points.