THREE DAYS after the Reserve Bank India’s (RBI’s) decision to hike repo rate by 40 basis points, mortgage firm HDFC Ltd on Saturday hiked its Retail Prime Lending Rate (RPLR) by 30 basis points. Canara Bank and Punjab National Bank (PNB) also joined other banks in hiking Repo-Linked Lending Rates (RLLR) by 40 basis points.
The rise in RLLR will lead to an increase in equated monthly instalments (EMIs) on home, vehicle and other personal and corporate loans. The increase in EMI, along with possible subsequent rate hikes and the expected inflation (including food inflation), could visibly damage the cash flows of borrowers, rating agencies said. According to India Ratings, the rising deposit rates would limit the spread benefit for lenders, especially for those with a higher proportion of liabilities at the shorter end, wherein the effect of this rate hike would be immediate and larger. The longer tenor loans, viz. home loans and loans against property (LAP) are likely to witness a sharper increase in EMIs, it said.
ICICI Bank, Central Bank of India and Bank of India raised RLLRs two days ago. Other banks are set to follow suit as cost of funds is bound to rise following the sudden RBI move.
HDFC said the hike will come into effect from May 9. HDFC’s new rate for loans (for a credit score of 750-plus) will be 7 per cent. For loans up to Rs 30 lakh, the new rate will be 7.1 per cent and 7.05 per cent for women borrowers. Its new rate for loans between Rs 30-75 lakh will be 7.35 per cent (7.3 per cent for women)
HDFC had recently increased its benchmark lending rate by 5 basis points, leading to an increase in EMIs for existing customers.
PNB said the RLLR has been hiked from 6.5 per cent to 6.9 per cent with effect from June 1, 2022 for existing customers. It also increased the savings deposit rates for various tenors. For term deposits of less than Rs 2 crore, it has raised the interest rates to up to 5.1-5.15 per cent.
For single term deposits of Rs 2 crore and up to Rs 10 crore, customers will get interest rates in the range of 3.5-4.05 per cent per annum.
Canara Bank has increased RLLR by 40 basis points from 6.9 per cent to 7.3 per cent. It has changed its Marginal Cost of Fund Based Lending Rate (MCLR) on loans across all tenors with effect from May 7, 2022. One-year MCLR is now 7.35 per cent, it said.
ICICI Bank raised its external benchmark-linked lending rate by 40 basis points to 8.1 per cent on Thursday. Bank of Baroda has hiked RLLR by 40 basis points to 6.9 per cent. Bank of India and Central Bank of India also raised RLLR by 40 basis points to 7.25 per cent. 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 tenor baskets for retail customers.
For banks, about half of retail loans were home loans (they also amount to 15 per cent of the total non-food bank credit) at end- FY22.
Banks, which are offering repo-linked lending rate, will have to hike interest rates by 40 basis points. As per an October 2019 circular from the RBI, banks linked their retail loans 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 lending rate of banks.
The share of RLLR loans in total advances was 39.2 per cent in December 2021, according to the RBI. MCLR-linked loans had the largest share (53.1 per cent) of the loan portfolio of banks as of December 2021.
According to India Ratings, to cushion the impact on the cash flow, lenders are likely to become more flexible with respect to tenor extensions. The share of term deposits in the less-than-one-year bucket increased to 76 per cent from about 73 per cent during FY19-FY21. Of this, about 40 per cent of the term deposits were for a tenor of less than three months. While the transmission of the rate hikes might neither be proportionate nor immediate, there is high possibility for deposit repricing, especially since some banks’ incremental loan to deposit ratio was more than 100 per cent in 9MFY22, implying that the competition for deposits could intensify.