Hyderabad: The Reserve Bank’s decision to increase the benchmark interest rate, the repo rate at which banks borrow short-term money, by 250 basis points in less than a year has resulted in a 16 percent increase in interest cost for an affordable housing buyer in a year as banks and lending institutions have either increased the tenure of repayment or increased the EMI or both depending on the borrower’s age and profile, showed a calculation done by the SBI Research Team.
In order to battle high retail inflation in the country which has been hovering above 6%, above the upper band set by the Government for the RBI under the law, the Central Bank has increased the repo rate by 2.5% since May 2022. As a result, banks have transmitted the interest rate hike to both deposit and credit rates affecting the Equated Monthly Installment (EMI) paid by the borrowers who borrow loans for buying houses, and automobiles and to meet other personal needs.
The data analysed by the SBI Research Team showed that the incremental housing loans of ASCB have increased by over Rs 1.8 lakh crore in April 2022 to January 2023 period, an increase of Rs 40,000 crore during the same period of last year. However, a segment-wise analysis reveals a different story. It shows that in the fresh disbursal of loans by the banks and lending institutions, the proportion of home loans in the affordable housing segment, those borrowers who take loans upto Rs 30 lakhs, in the total loans disbursed have declined to 45 percent during the last two months – January-February period this year.
The share of affordable housing loans, the loans up to Rs 30 lakh, in the total home loans was 60 percent during April-June 2022 period but it declined substantially after the Reserve Bank started to increase the repo rate from May last year. As against this, the share of loans above Rs 50 lakh has increased from 15 percent to 25 percent in the fresh loans issued in the current financial year. It shows that the RBI’s repo rate hikes have hit the affordable housing loan segment much more than higher-end of home loan borrowers.
Speedy transmission of RBI policy rate changes
The linking of home loans with an external benchmark or repo rate has led to the removal of the differential interest rate for those home loan borrowers who are taking home loans of Rs 30 lakh or less. In principle, to ensure immediate transmission as per RBI norms, home loans of lower amounts are offered on the interest rates linked to the External Benchmarked Lending Rates (EBLR).
This in turn could possibly explain the decline in home loans at the lower end of the spectrum as the home loan interest rates have significantly increased within a short span of time with the Reserve Bank of India’s decision to frontload the increase in the interest rates. Home loans have been linked with repo rates since October 2019.
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As part of its inflation and growth management strategy, the Reserve Bank reduced the repo rate during October 2019 to May 2020 but the Central Bank again started to increase the policy rates since May last year to battle the high retail inflation which was triggered by high fuel and global commodity prices due to Russia-Ukraine war and other global supply chain disruptions. As a result, the Reserve Bank has increased the repo rate by 250 basis points between May 2022 and February 2023.
This rapid increase in the External Benchmarked Lending Rates (EBLR) has resulted in banks to either increase the loan tenure or increase in EMI or both depending on the age of the borrower, tenure of the loan and the residual tenure of the loan. “Our analysis indicates that of around 55 lakh home loan accounts linked to EBLR, approximately 47 lakh customers with loans amounting to approximately Rs 8 lakh crore witnessed an increase in tenure or EMI or EMI and tenure in their existing home loan,” said Soumya Kanti Ghosh, Group Chief Economic Advisor of State Bank of India.
Ghosh said the preliminary analysis done by the Research Team showed that the 250 basis points increase in the repo rate and its pass-through in EBLR, could increase the interest component alone by at least 16 percent for a retail borrower of home loan in a year resulting in a situation where outstanding loan amount increases incrementally, even though it is being serviced. “In extreme cases, the interest servicing could outstrip the principal component itself. On the downside, if the borrower wants to keep the EMI unchanged, the loan tenure could extend beyond 5 years, the maximum permissible RBI extension limit,” Ghosh said in a statement sent to ETV Bharat. According to a calculation done by the SBI Research team, the interest cost on home loan borrowers might have increased by more than Rs 20,000 crore.
