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MUMBAI : The days of low interest rates are over, and loans will become dearer following the monetary policy committee’s decision on Wednesday to raise the policy repo rate by 40 basis points.

For floating rate loans linked to the repo rate, the transmission of the rate hike will be immediate, bankers said. Loans linked to other external benchmarks such as treasury bills will also get pricier, they added.

For loans linked to the marginal cost of funds-based lending rate (MCLR), the respective asset liability committees of banks are expected to meet soon.

The Reserve Bank of India (RBI) has mandated banks to price loans to retail and small business customers based on external benchmarks, while corporate loans are primarily linked to the MCLR. Floating rate loans to individuals disbursed before October 2019 are mostly linked to MCLR, but banks allow customers to switch to external benchmarks for a fee.

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“We will now send a communication to customers giving them an option to either pay higher equated monthly instalments (EMIs) or increase the tenure, if there is space available. The rate hikes would be effective from the next payable EMI," said a senior private sector banker.

Last month, State Bank of India (SBI), Bank of Baroda (BoB), Axis Bank and Kotak Mahindra Bank had hiked MCLR rates. The largest chunk of floating rate bank loans, at 53.1%, is linked to the MCLR, while 39.2% is linked to external benchmarks as of December 2021, according to data from the RBI.

The rate-setting panel of the RBI met out of turn on Monday and Wednesday to “reassess the evolving inflation-growth dynamics" and address the impact of the developments after its April meeting. The six members of the committee unanimously voted for a 40 basis points hike in repo rate.

Decadal-low interest rates were driving demand for mortgages but borrowers will now have to shell out more as RBI goes all out to tame inflation amid global headwinds.

Anuj Puri, chairman of real estate services company Anarock Group, said for home buyers, this hike signals an imminent end to the all-time low interest regime, which has been one of the major drivers behind home sales across India since the pandemic began.

“Positively, for us, a bulk of our book is floating-rate. Therefore, the ability to transmit the interest rates as central bank increases is very much inherent in our loan book," Uday Kotak, managing director and chief executive, Kotak Mahindra Bank, said after announcing its Q4 results on Wednesday.

“We believe our growth momentum on loans will continue and we are very well-managed not only on credit quality, but also on asset-liability matching, cost of funds. We are getting into this period of high interest rates very well prepared as we go forward," said Kotak.

It is pretty clear the “wolf of inflation" is getting more entrenched and, therefore, there was clearly a need to move, he added. “I compliment the RBI for having the courage to take this call between policies and during market hours,"Kotak said.

That said, customers will now be able to get better returns on bank deposits. More so, as the central bank is expected to further raise the repo rate this year. Banks have been raising deposit rates for a while, and a lending rate hike will bolster their margins. For customers of non-bank financiers, rate hikes are not far away as the borrowing costs of these lenders will also increase.

“We believe the lending rates may go up gradually, and since there is enough liquidity in the system, our borrowing cost may go up only gradually. Most of the borrowing for us is fixed in nature and, hence, the rate hike will not have an immediate impact on our borrowing costs," Umesh Revankar, vice-chairman and managing director, Shriram Transport Finance, said.

RBI’s decision to also raise the cash reserve ratio (CRR) by 50 basis points to 4.5% was unexpected. Bankers said it will negate some of the margin gains they could make on lending rate hikes. The move will effectively suck out 87,000 crore of liquidity from the system. CRR is the percentage of funds banks have to set aside with the RBI at zero interest.

“By hiking the CRR, RBI is forcing the banking system to hold additional liquidity in reserve rather than lending it at lower rates to businesses," said Vishal Amarnani, head of fixed income, Emkay Wealth Management.

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