MUMBAI: Banks have started hiking their lending rates after the RBI hiked the repo rate by half a percentage point on Friday. The rate at which the RBI lends to banks is called the repo rate. While the transmission to lending rates is almost automatic due to the linkage with external benchmarks, the rise in deposit rates could be slower as there is surplus liquidity in the system, and most banks want to have a high level of credit-deposit ratio to improve margins.
The lenders that have revised their rates include ICICI Bank, Canara Bank, Bank of Baroda and Punjab National Bank. These banks have adjusted the external benchmark rates linked to the repo rate. According to ICICI Bank‘s website, the external benchmark lending rate (I-BLR) is 9.1% from August 2022. The private lender’s best home loan rates are available at 8.1% (repo rate + 2.7%).
Bank of Baroda said that the best rate under the repo-linked lending rate would be 7.6% for AAA-rated entities from August 6. According to its website, home loan rates range from 7.95% to 9.3%.
SBI’s website continues to reflect the older home loan rate beginning from 7.55% (effective June 15, 2022). While the rates for existing borrowers will go up by 50bps (100bps = 1 percentage point), the bank is yet to announce the new schedule of rates. The RBI on Friday increased the repo rate to 5.4% from 4.9%.
While these banks have already updated their websites, the interest rates on all loans linked to the repo rate will go up. Around 44% of all bank and most incremental home loans are linked to the repo rate. Bankers said that they do not expect the increase in rates to hit credit demand, which is picking up after two years of Covid- induced slowdown.
Announcing its results on Saturday, SBI chairman Dinesh Khara said that he expected credit growth to grow at 15% during the current financial year. The bank is not growing deposits aggressively as it has a credit-deposit ratio of 63%, which gives it headroom to grow its loan book. HDFC VC & CEO Keki Mistry also said that he did not expect demand for home loans to decline because of the rate hike.
According to the RBI, the shift to repo-linked rate has hastened the transmission of monetary policy action. “A survey of select banks showed that 20% of the loan book linked to external benchmark-linked rate has reset frequency less than the underlying benchmark. Over a third of the advances are at fixed rates in the case of private banks, which may experience unrealised losses through a reduction in the net present value of future cash flows in a rising interest rate cycle,” the RBI has said in its financial stability report in June 2022.