Lenders in no rush to raise loan rates after RBI’s 25 bps rate hike, say bankers

Banks are in no hurry to raise lending rates despite rising funding costs, as lenders adopt a calibrated approach to passing on higher interest rates to customers, bankers told Moneycontrol.

The Reserve Bank of India raised the repo rate by 25 basis points last month to 5.5 percent in response to rising inflationary pressures. However, there hasn’t been a broad-based increase in the rates of repo-linked loans.

Banks face no immediate pressure to hike lending rates and are timing their rate transmission across repo- and MCLR-linked loans, a senior banking official said, requesting not to be identified.

While some public sector banks such as Bank of Baroda (BoB), Indian Bank and Indian Overseas Bank have raised rates by 15-20 bps on an average, private lenders are yet to see this transmission play out yet.

Bank of India raised its repo-based lending rate to 8.35 percent from 8.10 percent, while BoB raised it to 8.15 percent from 7.90 percent.

The share of external benchmark-based lending rate (EBLR)-linked loans in total outstanding floating-rate rupee loans in Indian banks stands at 68.2 percent, the latest RBI data shows.

“The transmission of the repo rate hike is yet to reflect in the outstanding loan portfolio; for now it is only seen in the fresh new loans and any renewals…,” a senior banker with a large private lender said.

Changing the loan interest rate is a bank-specific process; however, a few banks do it the same month and some by the end of the quarter, the banker said.

No automatic extension of loan tenures

However, lenders are not yet extending the tenures of the loans being disbursed to cushion borrowers from the impact of higher interest rates. A rate hike increases a customer’s monthly EMI and interest burden but the onus of extending the loan tenure rests on the borrower, say bankers.

“Unless and until a customer comes with a specific request, there won’t be any change in the tenure of loans. It is the customer’s prerogative and the bank has no role to play in it,” the bank official quoted above said.

BoB managing director and chief executive officer Debadatta Chand said, “Any extension of the loan tenure is based on the customer’s request. However, MCLR-linked loans respond with a lag, as any change in MCLR depends on the repricing of deposits and a change in the cost of funds.”

This comes as banks look at ways to manage the transmission of higher interest rates without immediately increasing EMIs.

Deposit mobilisation takes precedence

While banks are not in a hurry to raise lending rates, the pressure to mobilise deposits is becoming more pronounced as liquidity conditions tighten.

Though there is yet to be a broad-based increase in deposit rates, the day may not be far when banks start considering the option.

“Liquidity conditions in the banking system have tightened only over the past few weeks. If this persists in the coming weeks, banks may look at repricing deposits, including retail term deposits. However, the timing and extent of any increase will depend on how liquidity conditions evolve,” Chand said.

While some lenders such as ICICI Bank and Indian Bank have raised select fixed deposit rates, other large banks have held steady.

While transmission is yet to gather momentum on the lending side, on deposits, the tight liquidity situation seems to be pushing banks to marginally increase deposit rates.

This comes at a time where bank credit grew 17.9 percent YoY to Rs 232.54 lakh crore as of October 15. Deposits narrowed the gap with credit growth, rising 16.6 percent to Rs 284.37 lakh crore, the RBI’s latest fortnightly data shows.