More expensive credit may not hurt credit demand, bankers say


Retail and corporate borrowers will face higher lending rates after Friday’s repo rate hike by 50 basis points to 5.4%, but bankers say it won’t hurt credit demand.

Rajiv Anand, deputy general manager of Axis Bank, said loan demand is unlikely to be impacted, adding that demand comes from the corporate, SME and retail segments. “It’s not that rates are unnaturally high, they’re at pre-Covid levels and the economy is growing.”

Partha Pratim Sengupta, MD & CEO, Indian Overseas Bank confirmed that his bank is seeing strong demand for loans.

Chandra Shekhar Ghosh, MD & CEO, Bandhan Bank also said demand for loans from MSMEs and individuals is picking up. “Businesses are doing better and there is a demand for working capital ahead of the holidays, although interest rates may have risen,” Ghosh said.

Also Read: TDS on Big Loan Waivers Likely to Go

However, the retail customers who borrowed at 6.5% a few months ago now have to service the loans at 8%, and that could hurt. “While there may not be immediate stress, a 150 basis point rise in lending rates is not small,” said Dipak Gupta, joint managing director of Kotak Mahindra Bank. Gupta added that the rate hike cycle is not over yet.

Other bankers also expressed similar concerns as the repo rate is expected to rise another 60 basis points. Meanwhile, the system’s loan-to-deposit ratio, which has been rising since October last year, was 73.1% in the fortnight ended July 15, up 365 basis points from the corresponding two weeks in 2021. It was also marginal higher than in the fortnight of July 1st.

Axis Bank’s Anand said that as deposits are growing at a slower rate than loans, deposits would be revalued, causing the MCLR to rise.

Also Read: ICICI Bank, PNB Raise External Benchmark-Based Lending Rates

“While the retail and SME loans are immediately re-rated as they are linked to external benchmarks, the translation to higher MCLR rates could take a while,” said IOB’s Sengupta.

Banks have already started raising interest rates on retail deposits. In absolute terms, bank deposits have increased by 13 trillion euros in the last 12 months. Loan growth was 14% yoy in the two weeks ended July 15, while the pace of deposit growth was 8.4% yoy.


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