Banks start raising lending rates after raising RBI by 50 basis points

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MUMBAI: Banks started raising their lending rates after that RBI raised the repo rate by half a percentage point on Friday. The rate at which the RBI lends to banks is called the repo rate. While the carry-over to lending rates is almost automatic due to linking to external benchmarks, the increase in deposit rates could be slower as there is excess liquidity in the system and most banks want high loan-to-deposit ratios to improve margins .
Lenders that have revised their interest rates include ICICI Bank, Canara Bank, Bank of Baroda and Punjab National Bank. These banks have adjusted the external reference rates linked to the repo rate. According to ICICI Bank’s website, the External Reference Rate (I-BLR) is 9.1% as of August 2022. The best rates for home loans from the private lender are 8.1% (repo rate +2.7%).

The Bank of Baroda said the best interest rate for repo-linked loans would be 7.6% for AAA-rated companies from August 6. According to their website, home loan interest rates range from 7.95% to 9.3%.
SBI’s website continues to reflect the interest rate for older home loans starting at 7.55% (effective June 15, 2022). While interest rates for existing borrowers will increase by 50 basis points (100 basis points = 1 percentage point), the bank has yet to announce the new rate schedule. The RBI hiked the repo rate to 5.4% from 4.9% on Friday.
While these banks have already updated their websites, interest rates on all loans linked to the repo rate will increase. Around 44% of all bank and most home loans are linked to the repo rate. Bankers said they do not expect the rate hike to hurt credit demand, which is picking up again after two years of the Covid-induced slowdown.
Announcement of the results on Saturday, SBI chairman Dinesh Khara said he expects credit growth of 15% for the current fiscal year. The bank doesn’t aggressively grow its deposits since it has a loan-to-deposit ratio of 63%, which gives it room to grow its loan book. Keki Mistry, CEO of HDFC VC, also said that he doesn’t expect demand for home loans to fall due to the rate hike.
According to RBI, the switch to repo-linked rates has accelerated the transmission of monetary policy action. “A survey of selected banks found that 20% of the loan book linked to external benchmarks is reset less frequently than the underlying benchmark unrealized losses through a reduction in the net present value of future cash flows in a rising interest rate cycle,” RBI said in its Financial Stability Report dated June 2022.

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