Hike rates

Banks raise rates: EMIs set to get more expensive, lender spread set to narrow

THREE DAYS after the Reserve Bank India (RBI) decided to raise the repo rate by 40 basis points, the mortgage company HDFC Ltd on Saturday raised its retail prime rate (RPLR) by 30 basis points . Canara Bank and Punjab National Bank (PNB) also joined other banks in raising repo-linked lending (RLLR) rates by 40 basis points.

The rise in RLLR will result in higher monthly equivalent payments (EMI) on home, auto, and other personal and business loans. The rise in the EMI, along with possible subsequent rate hikes and expected inflation (including food inflation), could visibly hurt cash flow for borrowers, the ratings agencies said. According to India Ratings, the rise in deposit rates would limit the spread benefit for lenders, especially for those with a higher proportion of short-term liabilities, where the effect of this rise in rates would be immediate and most important. Longer term loans, viz. home loans and loans on property (LAP) are expected to see a larger increase in EMIs, he said.

ICICI Bank, Central Bank of India and Bank of India lifted RLLRs two days ago. Other banks are ready to follow suit as the cost of funds is set to rise following the sudden move of the RBI.

HDFC said the hike will take effect from May 9. HDFC’s new loan rate (for a credit score over 750) will be 7%. For loans up to Rs 30 lakh, the new rate will be 7.1% and 7.05% for female borrowers. Its new rate for loans between Rs 30 and 75 lakh will be 7.35% (7.3% for women)

HDFC had recently raised its benchmark lending rate by 5 basis points, leading to higher EMIs for existing customers.

PNB said the RLLR was increased from 6.5% to 6.9% effective June 1, 2022 for existing customers. It also increased savings deposit rates for various terms. For term deposits of less than Rs 2 crore, he raised interest rates to 5.1-5.15%.

For single term deposits of Rs 2 crore and up to Rs 10 crore, customers will enjoy interest rates of between 3.5 and 4.05% per annum.

Canara Bank increased RLLR by 40 basis points from 6.9% to 7.3%. It changed its marginal cost of funds-based lending rate (MCLR) on loans at all maturities effective May 7, 2022. The one-year MCLR is now 7.35%, it said. .

ICICI Bank on Thursday raised its external lending rate linked to the benchmark by 40 basis points to 8.1%. Bank of Baroda raised the RLLR by 40 basis points to 6.9%. Bank of India and Central Bank of India also raised RLLR by 40 basis points to 7.25%. Several banks, including Bandhan Bank, Kotak Mahindra Bank, Jana Small Finance Bank, Bank of Baroda and ICICI Bank, also announced deposit rate hikes across multiple duration baskets for retail customers.

For banks, about half of retail loans were home loans (they also account for 15% of total non-food bank loans) at the end of FY22.

Banks, which offer repo-linked lending rates, will have to raise interest rates by 40 basis points. In line with an October 2019 RBI circular, banks have linked their retail lending to External Benchmark Lending Rates (EBLR). As a result, most banks have adopted the repo rate as their benchmark. As banks borrow money from the RBI at the repo rate, any change in it affects the banks lending rate.

The share of RLLR loans in total advances was 39.2% in December 2021, according to the RBI. MCLR-linked loans accounted for the largest share (53.1%) of banks’ loan book in December 2021.

According to India Ratings, to cushion the impact on cash flow, lenders should become more flexible on term extensions. The share of term deposits in the less than one year tranche increased from around 73% to 76% during the 2019-21 financial year. Of this amount, approximately 40% of term deposits were for a term of less than three months. Although the pass-through of rate hikes is neither proportionate nor immediate, there is a strong possibility of deposit repricing, especially as some banks’ incremental loan-to-deposit ratio was above 100% during the year. 9MF22, implying that competition for deposits could intensify.