Other lenders are expected to follow suit, likely trimming disposable incomes of borrowers and thereby dampening demand for non-discretionary goods.
While all banks will automatically pass on the entire repo rate increase to customers who had availed of loans linked to external benchmarks, in the case of Marginal Cost of funds-based Lending Rate (MCLR) and fixed rate loans, their asset liability committees are expected to take a call on the quantum of the hike.
More than 53% of all outstanding bank loans are linked to the MCLR currently, and 25% is linked to external benchmarks such as the repo or government securities. The remaining are fixed rate loans.
ICICI Bank posted on its website on Thursday that it had raised its external benchmark lending rate (EBLR) to 8.10% from 7.70%.
MCLR Raised Before RBI Hike | page 8
“ICICI Bank External Benchmark Lending Rate (I-EBLR) is referenced to RBI Policy Repo Rate with a mark-up over Repo Rate. I-EBLR is 8.10% …effective May 4,” it said. As of May 1, its one-year MCLR was at 7.25%.
Meanwhile, public sector lender Bank of Baroda also made a similar announcement on its website. “With effect from May 5, 2022, the relevant Baroda Repo Linked Lending Rate (BRLLR) for retail loans is 6.9%,” it said. It was previously 6.50%.
Separately, Bank of India said in a notification to the stock exchanges that its repo-based lending rate has risen in tandem with the central bank’s rate increase.
“This is to inform that Bank’s Repo Based Lending Rate (RBLR) has been changed to 7.25% with effect from 04.05.2022 in terms of Pricing Policy approved by Bank’s Board,” it said. It was 6.85% earlier.
Repo is the rate at which the RBI gives short-term funds to banks. The central bank hiked the repo rate to 4.40% on Wednesday from 4% earlier.
Over the last two years, interest rates have been at historic lows.
Home loans were available from as low as 6.5%, while car loans started from 7% and personal loans from 10%.
If inflation continues to breach the banking regulator’s comfort band of 2-6%, interest rates could rise by as much as 200 basis points (bps), said bankers and economists.
A basis point is one-hundredth of a percentage point.
“Considering the negative growth impact of every hike, less is more as far as the rate trajectory is concerned; we expect another 75-100 bps hike in this fiscal with a terminal rate of 6.5% on the repo in the current cycle,” said Prerna Singhvi, economist, NSE.
Anticipating a rate hike, banks have over the past few months been raising their MCLR, in effect passing it on to borrowers albeit over a six-month or one-year horizon.
State Bank of India, the country’s largest lender, had raised its MCLR recently by 10 bps, while Bank of Baroda raised it by 5 bps across tenors.