Banks Follow in RBI’s Footsteps, Start Rate Hikes
MAS Team | 07 May 2022
Close on the heels of the Reserve Bank of India (RBI)’s  surprise increase of 40 bps (basis points) in its repo rate to tame the rising inflation, ICICI Bank, Bank of Baroda, HDFC and Bank of India have similarly raised interest rates on new loans by 40 bps. 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. A basis point is one-hundredth of a percentage point.
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%.
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.
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.
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.