Lending rates on some types of loans may rise by 30-40 basis points after the Reserve Bank of India amended their risk weight guidelines, according to the CEOs of three major banks. A rate hike is unavoidable, they added, declining to be identified because the additional cost of funds as a result of the RBI action will be passed on to borrowers.
"An increase in risk weight will result in a decrease in return on equity, and as a result, banks will make some rate changes." Expect a shift in lending rates of 30-40 basis points (bps) or more for personal loans, according to one of the bankers. Unsecured loans will become more expensive as interest rates climb. To combat inflation, the RBI has raised the repo rate by 250 basis points since last year.
In February, the key rate was raised by 25 basis points to 6.5 percent, the highest level in more than five years. According to the HDFC Bank website, interest rates on personal loans now range from 10.50 percent to 25 percent per annum for terms ranging from three months to 72 months.
According to the ICICI Bank website, the rates range from 10.50 percent to 16 percent. State Bank of India's interest rates begin at 10.55 percent, while Bank of Baroda's rates vary from 12.40 percent to 17.45 percent.
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To combat the proliferation of unsecured consumer loans, the central bank increased the risk weight allocated to consumer loans of banks and non-banking financing organizations by 25 percentage points on November 16. This means that banks and non-bank financial companies (NBFCs) must set aside more capital when making such loans. Credit cards, as well as some personal and retail loans, are examples of consumer loans.
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"We will work on raising rates by around 40 basis points to balance our rising capital," another top banker stated. A third banker expressed similar sentiments, stating that his institution, too, might boost rates depending on market conditions. Dinesh Khara, chairman of State Bank of India, the country's largest lender, had stated that the hike in funding costs will result in a rate increase. "The bank will look at raising interest rates if the cost of funds goes up," Khara said in a statement.
