Banks Follow in RBI’s Footsteps, Start Rate Hikes

Close on the heels of the Reserve Bank of India (RBI)’s  surprise increase of 40 bps (basis points) in its repo rate to tame the rising inflation, ICICI Bank, Bank of Baroda, HDFC and Bank of India have similarly raised interest rates on new loans by 40 bps. Repo is the rate at which the RBI gives short-term funds to banks. The central bank hiked the repo rate to 4.40% on Wednesday from 4% earlier. A basis point is one-hundredth of a percentage point.
 
Other lenders are expected to follow suit, likely trimming disposable incomes of borrowers and thereby dampening demand for non-discretionary goods.
 
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.
 
More than 53% of all outstanding bank loans are linked to the MCLR currently, and 25% is linked to external benchmarks such as the repo or government securities. The remaining are fixed rate loans.
 
ICICI Bank posted on its website on Thursday that it had raised its external benchmark lending rate (EBLR) to 8.10% from 7.70%.
 
Meanwhile, public sector lender Bank of Baroda also made a similar announcement on its website. "With effect from May 5, 2022, the relevant Baroda Repo Linked Lending Rate (BRLLR) for retail loans is 6.9%," it said. It was previously 6.50%.
 
Separately, Bank of India said in a notification to the stock exchanges that its repo-based lending rate has risen in tandem with the central bank's rate increase.
 
Over the last two years, interest rates have been at historic lows.
 
Home loans were available from as low as 6.5%, while car loans started from 7% and personal loans from 10%. If inflation continues to breach the banking regulator's comfort band of 2-6%, interest rates could rise by as much as 200 basis points (bps), said bankers and economists.
 
Anticipating a rate hike, banks have over the past few months been raising their MCLR, in effect passing it on to borrowers albeit over a six-month or one-year horizon.
 
State Bank of India, the country's largest lender, had raised its MCLR recently by 10 bps, while Bank of Baroda raised it by 5 bps across tenors.

User

  Loading...
  Loading...

To continue


Please
Sign Up or Sign In
with

Email

We are listening!

Solve the equation and enter in the Captcha field.

Changes in Our Business Model
 
 
Greetings from Moneylife Advisory Services
 
Between financial years 2019-21, SEBI has come up with extensive changes to investor advisor regulations. On Sep 23, 2020, SEBI had issued new additional guidelines. This comes just two months after extensive changes announced in July 2020. Earlier, in December 2019 there was an ad hoc circular
 
As a result of these changes, IAs, cannot accept fees through credit cards, will have to sign a 26-clause investor agreement, have to maintain physical record written & signed by client, telephone recording, emails, SMS messages and any other legally verifiable record for five years. IAs were already asked to record the suitability and rationale for every piece of advice given, sign them and store them for five years.
 
While these extensive and frequent changes, designed to strengthen the conduct of IAs are well-meaning, these have sharply increased compliance efforts and cost. We, being online advisors, find many of changes harder to implement, compared to advisors working in the physical space. We will have to have an army of advisors, administrative and tech staff to be compliant. If we do this, we will have to divert money to these areas and the cost of our service will double. We want to remain the least-cost service in the market to benefit more and more people. In the circumstances, we are forced to change our business model from “advisory” to “research”. This will mean the following:
 
What remains the same:
  • Recommendations on insurance, investment and Lion stocks, will continue as a part of the MAS premium subscription. Our strength has always been research and this will remain available to you through our recommendations.
  • The magazine and all textual content will remain as part of the service
  • We will have to suspend the restructuring tool.
 
What changes:
  • The interactions in Ask / Handholding will offer investment advice but not specific to your situation. It will offer information on investment products and also clarify your doubts about various financial products. It will be a forum for information, not for advice. This will be implemented with immediate effect and our guidelines in Ask, reflect this now.
 
Over the next few weeks our site and our communication to you will reflect these and other additional changes.
 
We feel this will not affect you much in terms of what really matters in investing: knowing what to buy and when to buy. This is our edge and it will still be available to you.
 
img
Debashis Basu
Founder