Chart of the Day: Rate cuts bypassed credit cards during pandemic

The years FY21 and FY22 were characterised by deep rate cuts and copious liquidity in order to reduce the impact of the pandemic on the economy. On the back of 115 basis point cut in the policy repo rate by the Reserve Bank of India (RBI), the weighted average lending rate (WALR) had declined 132 bps by the end of FY22.

But this cut didn’t trickle down evenly for all loan products. Indeed, banks have been careful in pricing risk during the pandemic even though low interest rates and forbearance were motivation enough to push loans.

The WALR for corporate loans fell by 152 bps while that for retail loans slipped 115 bps. As the above chart shows, within retail the pricing difference was even wider.

Housing loans, the safest loan category, witnessed the sharpest fall in interest rates during pandemic years. The WALR for home loans dropped by 128 bps, more than the overall retail loan book of banks.

Rates on credit cards, on the other hand, rose by roughly 40 bps. Credit cards and unsecured personal loans are the riskiest loan products and during times of stress tend to be the first to see delinquencies. That explains why interest rates were hiked in these categories during the pandemic.

As the rate cycle has turned now with the RBI setting out to hike policy rates, loan rates across products have begun to climb. It remains to be seen whether unsecured loans would continue to invite high interest rates and spreads given that credit risk has increased owing to rate hikes.