Friday 1 July 2022
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Banks raise lending rates after repo rate hike by RBI

The rate of interest you pay on home loans, car loans, loans against property, etc are all going up, as banks have passed the cost of the additional repo on to customers

Both private and public sector banks have started increasing their lending rates further, with the Reserve Bank of India (RBI) last evening raising its policy repo rate by 50 basis points barely a month after a similar exercise on 4 May. This increase in the benchmark rate at which it lends to banks was in addition to the 40 basis points hike in May, thus bringing the repo rate to 4.90%.

Banks had already begun raising their lending rates in May. Now, one can expect a further climb upward, especially if loans are linked to external benchmarks like the repo rate. For the last three years, interest rates had been falling against the backdrop of a slowing economy and the impact of the Covid-19 pandemic. Typically, lending rates are based on a bank’s base rate or marginal cost of funds-based rate (MCLR). Prodded by the central bank to ensure a speedier transmission, many banks have also launched loans, where interest rates are linked to an external benchmark. Here interest rates move in tandem with the change in the benchmark rate.

Leading banks like ICICI Bank, Bank of Baroda and Punjab National Bank revised their lending rates linked to the repo rate, following RBI’s monetary policy committee meeting yesterday. Interest rates in this type of loans is typically calculated on the repo rate plus an additional markup.

ICICI Bank has raised its external benchmark lending rate to 8.60% from 8.10% on 8 June. Bank of Baroda said on its that the interest rate on various loans linked to repo linked lending rate would be 7.40% effective from June 9. Punjab National Bank too raised its repo-linked lending rate to 7.40% from 9 June.

Furthermore, ICICI Bank had also revised its MCLR from June 1. Its one-year MCLR rate is now at 7.55%. Private sector rival HDFC Bank revised its MCLR on 7 June. Its one-year MCLR currently stands at 7.85%.

Punjab National Bank had also raised its MCLR by 15 basis points, effective from June 1. Its one-year MCLR is currently at 7.40% and its three-year MCLR is at 7.70%.

With the RBI expected to raise its repo rate further through the year ending March 2023, lending rates will only go up from here.

“With the increase in repo rate over FY23, the pace of transmission will be more effective as the proportion of banking sector’s floating rate loans linked to the external benchmarks has risen further from 39.2%/ 28.6%/ 9.3% in December 2021/ March 2021 and March 2020, respectively,” pointed out Kunal Shah, the analyst at ICICI Securities.

Over the last two years, the proportion of loans linked to MCLR has come down to 53% as of December 21 from 77.7% in the financial year 2019-2020. Around 46% of retail loans, 69% of loans to micro, small and medium enterprises and 20.4% of loans to large industries are linked to external benchmarks and will be repriced with the repo rate being hiked, said Shah.

Just a few months ago, banks were offering home loans for as low as 6.5%. These home loan rates have already moved up closer to 7%. Interest rates on other products like loans, gold loans and personal loans too will go up in due course as banks revise their MCLR.

While your equated monthly instalments (EMIs) are undoubtedly going up, with the RBI clearly focused on taming inflation by way of raising interest rates, your fixed deposits in banks will also fetch a higher interest rate.

Banks to charge you extra for your loans

For existing home loan borrowers, the equated monthly instalment or EMI is set to increase. Assume, you have a home loan of Rs 30 lakh outstanding with a tenure 20 years at a 7.05% interest rate per annum. At present, you have an EMI of Rs 23,349.

If the interest rate jumps by 50 basis points or 0.5%, then your EMI will rise to Rs 24,260.

For a home loan of Rs 50 lakh outstanding at a 7.05% interest rate for 20 years, the EMI will go up to Rs 40,433 from the existing Rs 38,915.

“With around 40% of the rates of loans in the banking system linked to external benchmarks, as the RBI hikes the repo rate, the cost of borrowing will keep increasing. Retail loans such as home loans are mostly linked to external benchmarks and will see a pass-through of higher policy rates. Amongst banks private sectors have a relatively larger share of loans which are in the external benchmark based lending rate regime,” said senior economist Suvodeep Rakshit of Kotak Institutional Equities.

Impact of 50 bps repo rate hike on various home loan amounts linked to the rate

HOME LOAN AMOUNT (RS)ASSUMED INTEREST RATE (% P.A.)ASSUMED TENURE (YEARS)EXISTING EMI (RS)NEW INTEREST RATE (AFTER REPO RATE CHANGE)NEW EMI (RS)
30 Lakh7.052023,3497.5524,260
50 Lakh7.052038,9157.5540,433
1 Crore7.0520778307.5580,865

Impact of 50 bps repo rate hike on various car loan amounts linked to the rate

CAR LOAN AMOUNT (RS)ASSUMED INTEREST RATE (% P.A.)ASSUMED TENURE (YEARS)EXISTING EMI (RS)NEW INTEREST RATE (AFTER REPO RATE CHANGE)NEW EMI (RS)
10 Lakh7.4715,2897.915,536
20 Lakh7.4730,5787.931,073

“Banks have also raised deposit rates across maturity buckets with peak retail term deposit rates being at 5.75%. Also, wholesale peak term deposit rates are in the range of 5.25-5.75% for leading private banks. Now, with another 50 bps repo rate hike, rates will be further revised upwards,” said Shah.

ICICI Bank revised its deposit rates for certain categories from today. Several other banks too have raised their FD rates upwards in the last few weeks.

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