How will banks pass on the burden of interest rate hike to customers?

 

• RBI repo rate hike: Since banks link their lending rates to repo rates, any change in repo rate will impact your loan EMI

The Reserve Bank of India (RBI) increased its policy repo rate by 35 basis points (bps) to 6.25 per cent with immediate effect. The decision was taken after a three-day session that ended on December 7.

Since banks link their lending rates to repo rates, any change in the repo rate will affect your loan EMI as well. Every time the central bank increases repo rates, banks in turn increase their lending rates.

IMGC (India Mortgage Guarantee Corporation) chief risk officer Shrikant Srivastava said that now that the repo rate has been increased by another 35-bps, EMIs are expected to rise by another ~3-5%. As far as increase in loan tenure is concerned, I don't see any scope for increase in loan tenure beyond 13 years so far due to 190 bps previous increase.

Home loan borrowers whose home loan prime interest rate was 10-11% and the initial loan tenure was more than 25 years had no option but to increase their EMIs as any attempt to extend their loan tenure would result in loan negative will be refined. Meaning, the principal EMI will not be sufficient to cover the monthly interest payable along with the existing EMI, resulting in the loan principal increasing instead of decreasing every month.

Banks are increasing their benchmark lending rates from May 2022.

“Most banks have so far passed on the 190 bps repo rate hike in full to home loan consumers. This rate hike of 190 bps has resulted in an increase in loan tenure of ~13 years for borrowers who initially opted for a loan tenure of 20 years, assuming they took a home loan at 6% at the time of home purchase was. Alternatively, borrowers who have opted for an increase in EMIs instead of an increase in loan tenure have already seen an increase of ~20% in their EMIs," said Shrikant Srivastava.

The financial sector has historically been the most sensitive to changes in interest rates. Normally, during a rising interest rate scenario, the banking sector passes on rate hikes through floating rate loans while delaying rate hikes for deposits, benefiting from spreads, and expanding margins.

“Banks report strong topline growth on the back of healthy disbursements, higher loan rates and strong earnings growth on the back of promising advances. A change in stance by RBI going forward will give a fillip to the banking sector, while a prolonged accommodative stance will impact deposit rates and lead to lowering of NIM, more so for PSBs," said Anil Rego, Founder and CEO at Right The fund manager said Horizon, a SEBI registered portfolio management service provider.