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Pass-through of rate hikes to lift bank margins sharply

Banks are expected to post steep net interest margins due to a near-total pass-through of Reserve Bank of India‘s policy rate hike under the External Benchmark Lending Rate (EBLR) regime.

They have passed on the entire 90-basis-point increase in RBI‘s repo rate to their lending rate, making home loans, car loans, personal loans and MSME loans expensive for borrowers.

EBLR is linked to the RBI’s repo rate. The other system used by banks to determine the rates, Marginal Cost of Funds Based Lending Rate (MCLR), is decided internally by the banks based on their cost of funds including the prevalent deposit rates.

“Unlike earlier up-cycles… the sharp pace of rate normalisation is margin accretive for banks in the near-term, especially given early-stage monetary transmission,” said Krishnan ASV, institutional research analyst, Securities. “Given the sheer pace of rate normalisation, we expect transmission on the MCLR book to significantly lag transmission on the EBLR portfolio, both in terms of the quantum and timing.”

According to Krishnan,

and are best positioned to capitalise on this stage of the rate cycle. ICICI Bank has 48% of its loans linked to EBLR and 22% to MCLR. For , these are 34% and 41%, respectively.

Nudged by the RBI, banks have gradually migrated their lending portfolios towards EBLR-linked loans with nearly 40% of loans across retail segments anchored to the repo rate. Leading private banks have 35-50% of their loan book currently linked to EBLR, with a three-month reset clause. Of all bank loans, 20-30% are currently based on MCLR and 40% on EBLR.

“What we are looking at now is an accelerated normalisation of the interest rate cycle; the unnaturally low rates which were merited due to Covid have to return to normal became abnormal low rates and high liquidity could result to sub-optimal credit choices,”

managing director Sanjiv Chadha said.

“I think most banks have raised their lending rates, the (interest rates) are trending upward,” said Shanti Ekambaram, group president – consumer banking at


As per a report by HDFC Securities, the re-pricing of the deposit side of the balance sheet is likely to happen gradually, given the surplus liquidity in the system and healthy credit to deposit ratios. Banks have raised their term deposit pricing by nearly 10-25 basis points over the past few months, which is likely to gradually reflect in the incremental cost of funds for banks.

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