Another increase in interest rates by RBI will increase the EMI of the loan

While this hike will immediately impact floating rate loans linked to external benchmarks such as repo, loans linked to other benchmarks will come into force soon. Under RBI rules, banks must reset the interest rate on loans linked to external benchmarks at least once every three months.

The impact of the rate hike will be visible from the next due date for equated monthly installments (EMIs) on new loans on the repo-linked benchmark. Debt linked to the marginal cost of funds-based lending rate (MCLR) – an internal benchmark – will take slightly longer to reassess. Banks benchmark retail and small business loans to external rates, while most corporate loans are pegged to their MCLR. With Friday’s hike, interest rates have risen by a cumulative 140 basis points since May.

Bankers, however, said they do not see any decline in demand for loans, be it retail or corporate. A senior private sector banker said credit growth has been strong so far, and he does not see customers delaying borrowing plans because of the hike in rates. He said customers were prepared that rates would eventually rise from the decade lows seen during the pandemic.

Shanti Ekambaram, nominated whole-time director of Kotak Mahindra Bank, said in an interview on August 2 that the demand for the bank continues to grow, which is not affected by the rate hike. Ekambaram said any moratorium on purchases is generally not linked to interest rates, but to factors such as property prices, jobs and transfers.

Total retail credit, at 35.2 trillion on June 17, up 18.1% from the previous year. Housing loans, a segment under total retail loans, witnessed a growth of 15% over the previous year 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 affect housing sales that were fueled by lower lending rates. “This lending rate calibration by RBI may indicate a decline in borrowers looking for home loans, as both new and existing home loan EMIs are set to rise, ushering in a wait-and-watch attitude among new homebuyers, V said. Swaminathan, executive chairman of loan disbursement firm Andromeda Loans.

That said, depositors will benefit as those rates are set to rise as well. RBI Governor Shaktikanta Das on Friday said several banks have increased their deposit rates in recent weeks and said he expects the trend to continue. Das said banks need deposits to support credit demand, and they cannot rely on central bank funds on a permanent basis.

Lenders believe that they will benefit on the margin front, at least in the near term, despite the inevitable hike in deposit rates. The private banker quoted above said that a large part of the existing loans would be revalued soon, depending on their reset period, the deposit rates would change only to the new ones and the existing deposits would continue at the same rate till maturity. Analysts were also bullish on the margins front.

“On the banking front, we consider this as a positive move, as this will further accelerate the pass-on for external benchmark linked loans and thus, offer greater support to the Net Interest Margin (NIM) trajectory from now onwards. Ashutosh Mishra, head of research (institutional equities) at Ashika Group, said.

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