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“Retail loans for most banks including us are linked to the repo now as the external benchmark. So while we have not taken a call now and our asset liability committee will meet shortly to take a call, we have seen some banks already hiking these rates. It is a natural thing that the pass through will happen and so those rates will go up and therefore the EMIs will also go up,” says Ashwini Kumar Tewari, MD, State Bank of India.



The 40 bps rate hike came just a month after RBI was fully comfortable about the situation including inflation. What do you think has changed dramatically since then to now?
RBI made it clear that even in the last meeting, they will be driven by data which is coming and the situation is extremely volatile because of the war in Ukraine and therefore the resultant hikes in the oil price and also the commodity prices and edible oil all of which are important variants, important ingredients into the India’s inflation number.

Inflation had been above the benchmark for last month and it is likely to be so this month. So maybe some early data which RBI has got has led them to take this decision even within the two meetings. But as the governor explained, they did this last time to respond to the Covid pandemic and then they reduced it by 150 bps. Therefore 40 bps to react to whatever developments there are which are happening is okay.

The other thing we have to remember is that the Fed rate hike was imminent and it happened last night and therefore one has to make sure that not too much outflow happens from other markets even as FII outflow from equity markets has been happening for some time. But other markets, debt markets, bond markets all may see some outflow because of the Fed action.

There is a theory that the inflation in the country is largely supply-driven and linked closely to crude. This could compress demand and do you think the RBI should have hiked rates earlier in the first place?
Consumer demand was either flat compared to the pre-Covid period or just below that number, so therefore RBI has been supporting the demand and growth so far by not hiking rates. So hiking it earlier probably would not have been okay for the demand because the recovery was still fragile. Recovery has been improving all this while but RBI’s mandate is inflation control. So, it has to be a balance between inflation control and growth.

The Governor did talk about it in the last meeting that in case it is warranted, then inflation has to be given priority and he has done that now. Therefore, I do not think that there is any reason for him to have hiked earlier because then the growth could have been impacted and now of course since the inflation continues to be high, it is hurting people and percolating into all different cost segments not only crude driven, but also commodity driven. It is edible oil driven and so many other inputs are linked into CPI and WPI both.

Given an overview as to what is going to happen now in terms of loan rates going up and EMIs rising with immediate effect, what do you think is going to be the impact of this on retail consumers? Do you know of any sort of an impact going forward on corporate and retail loans going forward?
Four broad things are likely to happen. On one hand, retail loans for most banks including us are linked to the repo now as the external benchmark. So while we have not taken a call now and our asset liability committee will meet shortly to take a call, we have seen some banks already hiking these rates. It is a natural thing that the pass through will happen and so those rates will go up and therefore the EMIs will also go up.

As far as other corporates are concerned, they have been deleveraging for the last two years. So for large corporates, I do not think there is too much impact. In any case, the interest cost was about 8% to 10% for most corporates and even lower for those who have deleveraged faster. So for them, it would not make too much of a difference. Of course, some interest hikes, some impact will be there because the market bond rates etc. also will go up but overall, I do not think the corporates will have too much of an impact.

It is the MSME sector which typically is a larger borrower of about 15% to 20% of their costs in interest. So, typically there may be some impact to MSMEs but overall, the rates for MSMEs are quite low and when they are supported by similar schemes, I do not think it is going to be a make or break situation for them because for them the more important thing is liquidity and timely availability of credit. So as long as we focus on making credit available to them. they should be able to absorb this cost.

No doubt it is a hike from where they were from presently, but since the system as a whole is moving, this should happen and finally the risk pricing we have been talking about from SBI and others as well, was not very proper earlier. There were loan rates which were lower than the sovereign rate and that is not a good idea. Therefore, some risk correction and pricing based on the risk will happen now which is a good thing for the overall system. That is the overall sense I get from this.

Could you help break down the impact of this on bank margins as well as on profitability? What does it mean for SBI in particular and how do your workings then change?
Our ALCO (asset liability committee) still has to take a call on this assuming that the rate hike passes through at 40 bps because that is clearly directly linked to the repo rate and so that portion of rates will increase. On the other side, we had hiked MCLR by 10 bps earlier. We will have to do a reworking on that to see what is the impact overall. The impact of the CRR hike, which takes away some liquidity and therefore some availability of credit for us, is very minimal, just about 2 bps for us and that is not too large.

At the same time, how much hike, if any, will do in MCLR is something we still have to work out. Therefore on balance, the impact on margins is not likely to be significant. In fact, margins may see some improvement because of this direct linked hike which is going to happen. On the deposit side, we have been raising rates and over time, for most of the maturities we will look to raise rates. Net-net, the impact on margins for us is not likely to be too significant.

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