Pressure building on banks to raise lending rates, albeit gradually

Real action only after policy rate revision

Taking a cue from the shift in policy stance and hardening yields, banks may look to revise (read hike) lending rates albeit in a calibrated manner. Much of upward revision in loan rates is expected to happen when the Reserve Bank of India hikes policy rates like repo, bankers said.

Bank executives credit offtake has been subdued said in the first quarter, especially in the wholesale segment. Small ticket loans – retail and MSMEs – are benchmarked to external parameters like repo rate. So little action is expected in the near term.

The Indian Bank Association chairman and Punjab National Bank managing director A K Goel said pricing of bank loans linked to repo rate will not be affected as the repo rate has been kept unchanged.

Lending rates especially on retail loans may hold current levels for a while. But the pressure would begin to build in this quarter on expectation of hike in policy repo rate which currently stands at four per cent.

Bank of Baroda’s economic research note said since the onslaught of the Covid-19 pandemic, MPC has been proactive to support growth and keep inflation in check. Both the policy rates were last reduced in May’20 with repo at 4% and reverse repo at 3.35% and has since been kept at historic lows.

The loans linked to MCLR are likely to enjoy the ultra-low rates for an extended period, making the environment conducive for reviving and fostering demand, it said.

RBI in its monetary policy report (April 2022) said The accommodative stance of monetary policy, ample surplus liquidity, and the floating rate loans linked to marginal cost of funds-based lending rate (MCLR) getting reset lower contributed to some further easing in commercial bank’s lending rates in the second half of Fy22.

RBI reduced policy repo rate by 250 basis points since February 2019, marking the start of the current easing phase. In response, the weighted average lending rates (WALRs) on fresh and outstanding rupee loans have declined by 213 bps and 143 bps, respectively.