Indian corporate and retail borrowers may now have to pay a higher rate of interest on their loans as banks have begun hiking the benchmark lending rates, indicating that the low interest rate regime may have come to an end.
Multiple bankers and analysts Moneycontrol spoke to on April 20 said that loan pricing could go up by at least 25-50 basis points from current levels over the next two quarters as lenders hike their marginal cost of fund-based lending rates (MCLR).
One basis point is one hundredth of a percentage point.
In banking parlance, MCLR is an internal reference rate for banks set by the Reserve Bank of India (RBI) to help define the minimum interest rate on various types of loans, including home loans. The final rate of lending will also include risk premium and spread charged by banks.
To simplify further, MCLR is the minimum rate at which banks can offer loans to end-consumers. Hence, when banks hike MCLR, new borrowers will have to shell out more to service their auto, home, vehicle and personal loans and will consequently see their equated monthly instalments (EMIs) rising in the coming months.
“Our base case is that loan interest rate for end-consumers could go up by 75 bps by March 2023, and by another 50 bps by March 2024, assuming that the RBI’s gradual rate hike cycle begins from the fiscal second quarter and as banks begin to reprice loans higher,” said Soumyajit Niyogi, Director of the core analytical group at India Ratings & Research.
“This means that loan rates could go up by 100-125 bps from current levels and dent a bigger hole in borrowers’ pockets,” he said.
Analysts said that this could mean lower disposable incomes for borrowers, leading to an adverse impact on consumption and demand. Higher EMIs could also result in increase in delinquencies for banks, they said.
State Bank of India, the country’s largest lender, increased its MCLR by 10 basis points across tenors, from April 15, for the first time in more than three years. Private sector lenders like Axis Bank and Kotak Mahindra Bank have also upped their MCLR recently.
According to Varun Khadelwal, fund manager and director at Bullero Capital, other banks are expected to raise their externally benchmarked rates in the months ahead, following the suit of MCLR hikes by market leaders like SBI and Axis Bank, as the RBI hikes the repo rate and monetary conditions tighten further.
The one-year MCLR at SBI stands at 7.1 percent, while that at HDFC Bank, ICICI Bank and Punjab National Bank stands at 7.25 percent. Bank of Baroda’s one-year MCLR stands at 7.35 percent, while that of Axis Bank and Kotak Mahindra Bank is at 7.40 percent.
The rise in MCLR by banks come ahead of a probable repo rate hike in June policy meeting amid concerns of rising inflation.
Retail inflation rose to a 17-month high of 6.95 percent in March, while the wholesale price inflation has stayed in double-digits for 12 consecutive months. Barclays chief India economist Rahul Bajoria expects the RBI-led Monetary Policy Committee to undertake four successive hikes in the repo rate, starting with the June policy. Bajoria predicts the repo rate to rise to 5 percent in the current cycle, from 4 percent now.
“There may be two ways in which externally benchmarked loans may get costlier. One is that the RBI will eventually hike the repo rate, leading to hikes in all loans. The second is that lenders may also start raising the markup on new repo-linked loans, even if the repo rate itself is unchanged,” said BankBazaar.com CEO Adhil Shetty.
According to analysts, if the repo rate is hiked, it could also lead to a consequent increase in the external benchmark-linked lending rate (EBLR), making loans costlier.
The transmission to banks’ lending and deposit rates has improved since October 2019 since RBI introduced the EBLR system. Under this, banks peg the lending rate to a benchmark like repo or Treasury Bill rates. According to the RBI’s monthly bulletin released on April 18, the share of EBLR loans by banks rose from 2.4 percent in September 2019 to 28.6 percent in March 2021 and to 39.2 percent in December 2021.“The external benchmark rates that are linked to Treasury Bills have been raised in the last six months after the RBI increased the size of variable rate reverse repo operations leading to surplus liquidity being absorbed at rates higher than reverse repo rates,” said Anil Gupta, vice-president and sector head for financial sector ratings at ICRA. “With expected hikes in repo rates as soon as June 2022 onwards, the repo linked rates shall also see an upward trend.”