Rising repo rates could dampen lending market sentiments; house, vehicles will become more expensive

The start of the new financial year had boded well for the banking sector in April, according to RBI’s daily payments data. Besides positive cards and UPI transaction trends, bank credit growth recovered by 10%, driven mainly by the retail segment (up 12% YoY) and the MSME sector, while business credit growth remained sluggish.

However, there are indications that the sudden rise in the Repo rate by 40 basis points could affect home loans, car loans, etc., as their EMIs are expected to become more expensive and could in turn affect the fixed income loan market. short term.

According to a report by Kotak Institutional Equities, the segment of home loans (up 6% year-on-year), credit cards (outstandings up 13% year-on-year) and gold loans (up 21% YoY) performed well in April. The report says loan growth has improved from the last half of calendar year 2021 and the trend is continuing. The pace of the credit recovery remains a key variable to watch.

The Kotak report showed that PSU banks have become more active in the business credit segment. It is expected that even if all banks strengthen retail credit, banks that already have a strong retail franchise should benefit more.

The interest rate environment had been favorable over the past few months, but inflationary pressures have now led the central bank to change its strategy and raise the Repo rate by 40 basis points to 4.40%. The repo rate has remained unchanged since May 2020. The RBI has also raised the cash reserve ratio (CRR) by 50 basis points, which will put further pressure on interest rates.

According to the Kotak report, lending rates on new loans have been volatile over the past few months. Over the past six months, new lending rates have fallen for PSU banks, but have remained stable for private banks. The spread between the new lending rates of private banks and PSU banks stood at 190 basis points. The spread between current lending rates and fresh lending rates had steadily narrowed and stood at 110 basis points.

THE WEEK had, in February, reported that retail loans, which are extended to individuals by a bank or any financial institution, continued to drive loan growth in India while the performance of corporate loans remained subdued, according to the latest. data for RBI’s 2021 financial year. Most of the demand came from smaller ticket segments. According to RBI data, personal loans are the main source of loan growth and grew by 14% year-on-year, while corporate loans fell by 4%.

Experts say the sudden rise in Repo rates could be a shock to the home loan segment among different loan categories.

“With inflation rising slightly in the aftermath of the Russian-Ukrainian war and soaring oil prices, the RBI made an unforeseen and difficult decision – to raise Repo rates by 40 basis points. Overall , this was expected, as inflation has definitely moved into the threatening zone.Unfortunately, for homebuyers, this rise signals the imminent end of the all-time low interest rate regime that has been l “a key driver of home sales across the country since the start of the pandemic. In addition, rising interest rates and inflationary trends in basic raw materials in construction, including cement, steel , the cost of labor, will add to the burden on the residential sector, which performed considerably well in the previous quarter – Q1 2022. This rise in interest rates will ultimately impact the cost of global acquisition for buyers of houses and could dampen residential sales to some extent,” remarked Anuj Puri, Chairman of ANAROCK Group.

Priscilla C. Carnegie