Banks start raising their lending rates for external benchmark loans

ICICI Bank raises its rate to 8.10%; BoB ups repo-linked rate to 6.90%

Consequent to the 40 basis point hike in the repo rate announced by the Reserve Bank of India (RBI) on Wednesday, large banks such as ICICI Bank and Bank of Baroda have raised their lending rates by an equal amount on loans linked to the external benchmark.

ICICI Bank on Thursday raised its external benchmark lending rate by 40 basis points to 8.10 per cent while Bank of Baroda increased its repo-linked lending rate to 6.90 per cent. The public sector lender has withdrawn the interest rebates for home and car loans. They were introduced to push retail credit.

RBL Bank’s repo-linked lending rate is now 9.50 per cent, effective May 4,2022. Mortgage lender HDFC will take a decision to raise rates in a few days, Keki Mistry, vice-chairman and chief executive officer, had earlier indicated to Business Standard.

Meanwhile, a State Bank of India executive said the bank’s asset-liability committee would meet in a week. The repo-linked rates will be reviewed then.  

Private sector lender Kotak Mahindra Bank increased its interest rate up to 50 basis points for select fixed deposits. The 390-day bucket will have a new rate of 5.5 per cent as against the old rate of 5.20 per cent.

For the 23-month bucket the new rate is 5.60 per cent against the old rate of 5.25 per cent. The 364-day bucket will carry 5.25 per cent, up from 4.75 per cent. The increase is effective from May 6, 2022.

The Monetary Policy Committee of the RBI raised the benchmark repo rate to 4.40 per cent in an off-cycle meeting, due to upside risks to inflation, signalling the rate cycle had turned and the days of ultra-low interest rates were over. This was the first rate hike in 45 months -- since August 2018.

After the repo rate hike, the RBI also increased the cash reserve ratio for banks by 50 basis points to 4.5 per cent of net demand and time liabilities (NDTL), effective from the fortnight beginning May 21, 2022.

This is expected to withdraw liquidity of Rs 87,000 crore from the system. The increase in the CRR is in line with its stance of withdrawing accommodation and its earlier announcement of gradually withdrawing liquidity over several years.

Analysts are of the opinion that the increase in the benchmark repo rate will augur well for banks because they will benefit from higher yields on the lending portfolio linked to external benchmarks but the CRR hike will have an adverse impact on their margins.

As of December 2021, a little over 39 per cent of bank loans, including 58.2 per cent of home loans, are linked to the external benchmark, shows the Reserve Bank of India (RBI) data.

The share of micro, small and medium enterprises, personal loans, vehicle loans, and education loans linked to the external benchmark are 69.2 per cent, 46.2 per cent, 31.1 per cent, and 23 per cent, respectively, the RBI data showed.

The RBI mandated the introduction of an external benchmark system of lending for select sectors in October 2019. Any change in the benchmark rate is mandated to be passed on to lending rates for new and existing borrowers on a one-to-one basis and banks are restricted from adjusting their spreads for existing borrowers for three years in the absence of any significant credit event.

“Hike in repo rate by 40bps should have a positive impact of 10-15bps on margins of banks across the board in our view as banks now have repo rate linked loans which weren’t there in the earlier cycle,” said Macquarie Research in its note.

But the increase in the CRR by 50 basis points will affect bank margins by four-five basis points. The RBI doesn’t pay interest to banks on cash reserves. The net impact on margins could be 5-10 basis points due to the two moves, the report added.

“The constraint for loan growth now becomes liabilities. We all need to see how each bank strategises. The days of easy liquidity are gone. The CRR hike will impound Rs 87,000 crore, or 0.5 per cent of deposits, but using the multiplier effect, the impounding is going to be much higher. So, the game for each bank is how they will manage the liabilities in a rising rate cycle,” said Suresh Ganapathy, associate director, Macquarie Capital.

Ommen K Mammen, chief financial officer, Muthoot Finance, said borrowing costs would go up for his company as banks revised their marginal cost of lending-based rates (MCLRs). Rates will go up for personal loans, credit to small and medium enterprises (SMEs), and home loans where the margins are thin. As for gold loans, the company will be in a position to manage costs.

Soumya Kanti Ghosh, Group chief economic adviser, State Bank of India, said: “We believe the decision on rate hikes will be good for the banking sector as the risk is getting re-priced properly.”

“Banks, already having wafer-thin margins in retail loans, have little incentive in not passing, to a great extent, the present and future hikes to customers whose equated monthly instalments should undergo upward revisions. With the rise in the CRR and expected further hikes in benchmark rates, there would be a marginal increase in the MCLR due to negative carry. Further, if banks raise deposit rates the cost of funds (CoF) will increase and subsequently the MCLR too will increase,” he said.

Motilal Oswal Financial Services said in a report: “The increase in repo rate will be positive for banks as they will benefit from higher yields on the lending portfolio that are linked to external benchmarks. A pick-up in advances growth, an improving asset mix, and continued hikes in policy rates will drive higher yields for banks over FY23E.”