After a mid-cyclic RBI rate hike, on Thursday, ICICI Bank raises the external benchmark lending rate by 40 bps to 8.10 per cent. “ICICI Bank External Benchmark Lending Rate” (I-EBLR) is referenced to RBI Policy Repo Rate with a mark-up over Repo Rate. I-EBLR is 8.10 per cent p.a.p.m. effective May 4, 2022,” the bank mentioned on its site. Meanwhile, the Bank of Baroda also hiked the repo-linked lending rate by 40 bps to 6.90 per cent. The Reserve Bank of India (RBI) on Wednesday raised the benchmark lending rate or repo rate by 40 basis points (bps) to 4.40 per cent. This was also the first instance of the Monetary Policy Committee (MPC) making an unscheduled increase in the repo rate. The decision was taken to contain inflation that has remained stubbornly above the target of 6 per cent for the last three months.
What is The External Benchmark Lending Rate?
External Benchmark Lending Rates (EBLR) are the lending rates set by the banks based on external benchmarks such as repo rate. This is the minimum interest rate at which commercial banks can lend. RBI introduced the Base Lending Rate (BLR) system in 2010, it moved to a Marginal Cost of Funds-based Lending Rate (MCLR) system in 2016, and in October 2019, it further introduced the External Benchmark-Linked Lending Rate (EBLR) regime.
When the RBI hikes the Repo Rate, it means that the cost of borrowing will be more for commercial banks. So, now that the RBI has increased the repo rate, lenders like ICICI, and Bank of Baroda have hiked their repo-linked interest rates against home loans, car loans, and others.
Now, home, auto, and other loans EMIs will increase after lenders have hiked their key interest rate by 40 bps, following the footsteps of the RBI in an effort to tame inflation that has remained stubbornly above target in recent months. In that case, the interest rates for existing borrowers linked to repo rate or any other interest rate benchmarks, both internal as well as external, would remain the same till the next reset date of their loans. The new interest rate on their reset date will be calculated after factoring in the benchmark rate applicable on the reset date and credit spreads. This new interest rate will then remain in force till the next reset dates of their loans, irrespective of any repo rate changes by the RBI in the interim. The repo rate cut would not impact any loans availed at fixed interest rates.
Will Other Lenders Follow?
Ratan Chaudhary – Head of Home Loans, Paisabazaar.com, said: ” Currently, most banks have linked their floating rate retail loans to repo rates. Hence, the 40 bps repo rate hike would eventually lead those banks to increase the interest rates for floating-rate loans, for both existing and new borrowers. However, the transmission of higher repo rates to the existing loans linked to repo rates would depend on their interest reset dates. Existing borrowers would continue to pay the existing interest rates till their next rest date. As higher repo rates would also increase the cost of funds for the lenders, lenders would have to steadily increase their lending rates for floating-rate loans linked to MCLR and previous benchmarks. The higher cost of funds should also lead the NBFCs to steadily increase their interest rates, both for fresh loans as well as their existing floating-rate loans.”
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