Borrowers may have to pay higherrate of interest on loans here's why?

Indian corporate and retail borrowers may now have to pay a higher rate of interest on their loans as banks have begun hiking the benchmark lending rates, indicating that the low interest rate regime may have come to an end.

In banking parlance, MCLR is an internal reference rate for banks set by the Reserve Bank of India (RBI) to help define the minimum interest rate on various types of loans, including home loans. The final rate of lending will also include risk premium and spread charged by banks.

To simplify further, MCLR is the minimum rate at which banks can offer loans to end-consumers. Hence, when banks hike MCLR, new borrowers will have to shell out more to service their auto, home, vehicle and personal loans and will consequently see their equated monthly instalments (EMIs) rising in the coming months.

"Our base case is that loan interest rate for end-consumers could go up by 75 bps by March 2023, and by another 50 bps by March 2024, assuming that the RBI's gradual rate hike cycle begins from the fiscal second quarter and as banks begin to reprice loans higher," said Soumyajit Niyogi, Director of the core analytical group at India Ratings & Research.

"This means that loan rates could go up by 100-125 bps from current levels and dent a bigger hole in borrowers' pockets," he said.

Borrowers hit

Analysts said that this could mean lower disposable incomes for borrowers, leading to an adverse impact on consumption and demand. Higher EMIs could also result in increase in delinquencies for banks, they said.

State Bank of India, the country's largest lender, increased its MCLR by 10 basis points across tenors, from April 15, for the first time in more than three years. Private sector lenders like Axis Bank and Kotak Mahindra Bank have also upped their MCLR recently.