Retail borrowers, small biz bear the brunt of interest rate hikes

livemint.com:

lending rate (MCLR)—internal benchmark banks used to price loans to companies—has increased 140 basis points (bps) since April, the repo rate used to price retail loans was raised 250 bps in the same period. Since October 2019, banks have been using external benchmarks—mostly the repo rate—to price retail and small business loans, although most corporate loans are linked to MCLR.

Given that MCLR tracks deposit rates of individual banks, transmission is staggered. It takes about nine months for deposits to get repriced once their rates are hiked, as unlike loans, existing deposits continue at the same rate till maturity.

According to recent data from the Reserve Bank of India (RBI), the share of external benchmark lending rate (EBLR) loans as a share of banks’ floating-rate portfolio stood at 49.6% in March, as against 48.3% in December and 44% in March last year. The higher the share, the faster rate changes reflect in rates at which customers borrow.

Meant to induce seamless transmission of rate changes by the central bank to bank lending rates, external benchmarks allowed retail borrowers to benefit when RBI was on a rate-cutting spree after the covid-19 pandemic. The tide turned after RBI started raising rates from May last year to counter runaway inflation before pausing in April.

“Retail borrowers were the first ones to get affected by the rate hikes, primarily because their loans are linked to external benchmarks where rate changes are immediately transmitted than internal benchmarks like MCLR," said Saswata Guha, senior director, financial institutions (banks), Fitch Ratings. Corporate loans are yet to be fully repriced, which will happen as per loan reset dates, Gupta said, adding banks are expected to get some