Equated monthly installments (EMIs) and borrowing costs on loans to get costlier
The equated monthly instalments (EMIs) and borrowing costs on loans will get costlier as major Indian banks have raised their lending rates or are set to do so after the Reserve Bank of India hiked its key repo rate by 50 basis points to fight spiralling inflation, a bane for the common man.
The repo rate is the rate at which banks borrow money from the RBI, and an increase in that results in a hike in borrowing costs for consumers.
Financial institutions are on an interest rate hike spree in line with RBI’s monetary tightening since May.
That means the EMIs on loans will get more expensive, as will the interest on fixed deposits.
State Bank of India:
The country’s largest lender State Bank of India, had increased its marginal cost of lending rate (MCLR) on loans by 10 basis points or 0.10 per cent effective from July 15, 2022.
While the SBI is yet to pass on the August RBI hike to customers, see below a table explaining the change in the EMI for a 20-year home loan based on the expected increase.
HDFC Bank:
Mortgage lender HDFC Ltd on Monday announced an increase in its benchmark lending rate by 25 basis points (bps), a move that will make loans dearer for both existing and new borrowers.
That is the second hike this month as an earlier hike of 25 basis points was effected from August 1 and the sixth increase undertaken by HDFC in three months.
The rate has increased by 140 basis points since May this year.
The rates would rise by 25 basis points or (0.25 per cent) for existing customers. HDFC follows a three-month cycle for repricing its loans to existing customers. So the loans will be revised in sync with an increased lending rate based on the date of the first disbursement of each customer.
ICICI Bank, Punjab National Bank Hike External Benchmark Based Lending Rates:
Two major banks — ICICI Bank and PNB — raised their lending rates after the RBI increased the benchmark interest rate by 0.50 per cent on Friday.
ICICI Bank External Benchmark Lending Rate (I-EBLR) is referenced to RBI policy repo rate with a mark-up over repo rate, ICICI Bank said in a notification.
Earlier this month, ICICI Bank revised the marginal cost of funds-based lending rate (MCLR) by 0.15 per cent across all tenors ahead of the RBI policy rate announcement.
State-owned Punjab National Bank (PNB) also raised the external benchmark’s repo, linked lending rate to 7.90 per cent.
A report by an internal study group of the RBI in 2017 said the internal benchmark rates like base rates or MCLRs were not delivering effective transmission of the central bank’s monetary policy repo rate decisions. It then recommended switchover to an external benchmark.
Subsequently, all new floating rate personal and retail loans (housing, auto) and floating rate loans to Micro and Small Enterprises by banks were linked to an external benchmark (repo) from October 1, 2019.
Banks can take the external benchmark as the RBI’s repo rate, the government’s treasury bill-based yields published by the Financial Benchmarks India Private Ltd (FBIL), or any other benchmark market interest rate published by FBIL.
The lenders are free to decide the spread over the external benchmark and offer such external benchmark-linked loans to other types of borrowers.
As per the RBI directions, the interest rate under the external benchmark is supposed to be reset at least once in three months.
