The out of turn rate hike by the Reserve Bank of India’s monetary policy will make loans more expensive for borrowers, especially the ones for longer tenors such as home loans and loans against property, according to India Ratings. For the lenders such as banks, the 40-basis points rate hike by RBI will directly increase the deposit rates, which would limit their spread benefits, the rating agency added. India Ratings said for a 15-year loan, a 50 basis points rate hike will increase EMI burden by upto 2.5 per cent while if interest rates are hiked by upto 1.5 per cent, EMIs can increase by as much as 9.4 per cent for the same tenure.
“While the hike in the repo rate since May 2020 would increase the borrowing rates for end-borrowers (existing and new), the rising deposit rates would limit the spread benefit for lenders, especially for those with a higher proportion of liabilities at the shorter end, wherein the effect of this rate hike would immediate and larger,” India Ratings said in a note last week. “To cushion the impact on the cash flow, lenders are likely to become more flexible with respect to tenor extensions,” it added.
Hike in the repo rates, ie the rate at which banks borrow from the central bank, and increasing inflation (including food inflation), could impact cash flow of the borrowers, India Ratings said. According to India Ratings, overall for banks, about half of the total retail loans were home loans at the end of financial year 2022. According to RBI’s estimates, home loans grew by 7 per cent in 2022.
Assuming the transmission of the repo rate hike to the lending rate (for the end-borrower) and no extension of tenor, the increase in EMI burden has been tabulated by India Ratings below:
Increase in EMI for end borrower:
| 0.40% | 0.50% | 1% | 1.5% | |
| 15-year loan | 2.5% | 3.1% | 6.2% | 9.4% |
| 7-year loan | 1.3% | 1.6% | 3.2% | 4.8% |
| 3-year-loan | 0.6% | 0.7% | 1.5% | 2.2% |
Last week, India’s largest private lender HDFC Bank increased interest rates for home loans by 30 basis points. HDFC’s action came after ICICI Bank, Bank of Baroda, and RBL Bank also raised interest rates after the announcement of rate hike by the monetary policy committee in an off-cycle meeting on May 4.