“We see incremental cost of borrowing rising by nearly 20 basis points; however, the larger challenge is that RBI won’t stop at this, it will likely take the repo to 5.15% and that would raise cost of funds by 50-60 bps,” said Ravi Subramanian, MD at Shriram Housing Finance. “So, we see a lot of loan repricing happening in the next 6-8 months and there will also be some compression on the margin side as some NBFCs look to absorb this hike rather than immediately passing it on to the borrower.”
HDFC, the biggest mortgage lender, raised its retail prime lending rate by 30 basis points, increasing the cost of borrowing for all floating rate home loan customers. The hike, effective May 9, came after the RBI pushed up key policy rates by 40 basis points on May 4. Other non-banks, too, are expected to follow suit and pass on the hikes to borrowers.
ICICI Bank, Bank of Baroda and Bank of India have raised interest rates on new loans by 40 basis points. While all banks will automatically pass on the entire repo rate increase to customers who had availed of loans linked to external benchmarks, in the case of marginal cost of funds-based lending rate (MCLR) and fixed rate loans, their asset-liability committees are expected to take a call on the quantum of the hike.
Banks and non-banks fear that a disproportionate rise in interest rates could pinch the borrowers badly. Some estimates suggest that repo rate could be hiked by 200 basis points, taking the key rate to above 6%.
“Immediately we won’t see a deterioration in credit quality, but a higher quantum of rate hikes and increase in risk premium for a certain segment of borrowers could push them towards a default situation,” the CEO of a mid-size NBFC said on the condition of anonymity. “The situation will especially be bad for those borrowers who are yet to recover from the vagaries caused by the pandemic.”
