More expensive loans may not hurt credit demand, bankers say

Retail and corporate borrowers will face higher interest rates on loans after Friday’s repo rate hiked 50 basis points to 5.4%, but bankers say it won’t dampen demand credit.

Rajiv Anand, Deputy Managing Director, Axis Bank, said credit demand should not be affected, adding that demand came from corporate, SME and retail segments. “It’s not like rates are abnormally high, they’re at pre-Covid levels and the economy is growing.”

Partha Pratim Sengupta, MD and CEO, Indian Overseas Bank, confirmed that his bank is experiencing strong demand for loans.

Chandra Shekhar Ghosh, MD and CEO of Bandhan Bank, also said that demand for loans from MSMEs and individuals is increasing. “Businesses are doing better and ahead of the holiday season there is a demand for working capital, although interest rates may have gone up,” Ghosh said.

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However, retail customers who borrowed at 6.5% a few months ago will now have to repay loans at 8% and that could hurt. “While there is no immediate stress, a 150 basis point increase in lending rates is not insignificant,” said Dipak Gupta, co-chief executive of Kotak Mahindra Bank. Gupta added that the rate hike cycle was not over yet.

Other bankers also expressed similar concerns, given that the repo rate is expected to be raised by another 60 basis points. Meanwhile, the credit-to-deposit ratio for the system, which has been rising since October last year, stood at 73.1% for the fortnight to July 15, up 365 basis points, from compared to the corresponding fortnight in 2021. It was also slightly higher than that of the fortnight of July 1.

Axis Bank’s Anand said that with deposits growing at a slower rate than credit, deposits would be revalued, causing the MCLR to rise.

Also Read: ICICI Bank and PNB Increase Benchmark External Lending Rates

“While retail and SME loans will be re-priced immediately as they are tied to external benchmarks, the transmission to higher MCLR rates could take some time,” said IOB’s Sengupta.

Banks have already started raising interest rates on retail deposits. In absolute terms, bank deposits have grown by $13 trillion over the past 12 months. Loan growth was 14% yoy for the fortnight to July 15, while deposit growth was 8.4% yoy.

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