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Loan EMIs set to rise as RBI delivers another rate hike

MUMBAI : Loan instalments are set to rise for the third time in four months, following the Reserve Bank of India’s (RBI) Friday decision to hike the policy repo rate by another 50 basis points (bps) to 5.4%.

While the hike would immediately impact floating rate loans linked to external benchmarks like the repo, those pegged to other benchmarks would follow soon after. Under RBI regulations, banks are supposed to reset the interest rate on loans linked to external benchmarks at least once every three months.

New loans on the repo-linked benchmark would see the impact of the rate hike from the next due date for equated monthly instalments (EMIs). Loans linked to the marginal cost of funds-based lending rate (MCLR) – an internal benchmark – will take a bit longer to reprice. Banks benchmark retail and small business loans to external rates, while most corporate loans are pegged to their MCLRs. With Friday’s hike, interest rates are up by a cumulative 140 basis points since May.

However, bankers said they see no downward trend in loan demand, be it retail or corporate. A senior private sector banker said loan growth has been robust so far, and he does not see customers delaying borrowing plans because rates have been hiked. He said that customers were prepared that rates would eventually go up, from the decadal lows seen during the pandemic.

Shanti Ekambaram, whole-time director-designate, Kotak Mahindra Bank said in an interview on 2 August that the bank was continuing to see demand, unimpacted by the rate hikes. Ekambaram said any postponement of purchase is normally not linked to interest rates, but factors like property prices, jobs and transfers.

Aggregate retail loans, at 35.2 trillion as on 17 June, were up 18.1% from the previous year. Housing loans, a segment under total retail loans, witnessed a 15% increase over last year to 17.4 trillion, showed data from RBI.

Despite the optimism displayed by lenders, the real estate sector is somewhat concerned that back-to-back rate hikes will impact housing sales that were propped up by low lending rates. “This lending rate calibration by the RBI could signal a downward trend in borrowers looking for home loans, as both new and existing home loan EMIs are set to go up, ushering in a wait-and-watch attitude among new homebuyers,” said V. Swaminathan, executive chairman of loan distribution firm Andromeda Loans.

That said, depositors stand to benefit as those rates are set to rise as well. RBI governor Shaktikanta Das said on Friday that quite a number of banks have already increased their deposit rates in the recent weeks and said he expects the trend to continue. Das said that banks need to have deposits to support credit demand, and cannot rely on central bank funds on a perpetual basis.

Lenders believe they would benefit on the margin front despite the inevitable rise in deposit rates, at least in the near term. The private banker cited above said that while a large section of existing loans would soon get repriced, depending on their reset periods, deposit rates would change only for fresh ones and existing deposits would continue on the same rate till maturity. Analysts also seemed buoyant on the margin front.

“On (the) banking front, we consider this as a positive move, as this will further speed up the pass-on to external benchmark linked loans and thus, will offer more support in net interest margin (NIM) trajectory from now onwards,” said Asutosh Mishra, head of research (institutional equity) at Ashika Group.

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