3 quarters of benefit from RBI rate hike as loans reprice faster

SBI sees 2-3 quarters of benefit from RBI rate hike as loans reprice faster

SBI Chairman CS Setty said banks may see some relief over the next two to three quarters as higher policy rates feed through to EBLR-linked loans. He expects adequate system liquidity to limit near-term pressure on deposit rates, while inflation will remain key to credit demand. Setty also discussed asset quality, account aggregator interoperability and the RBI's proposed technical committee.

By Latha Venkatesh

State Bank of India (SBI) Chairman CS Setty expects the banking sector to benefit from the Reserve Bank of India’s latest rate hike over the next two to three quarters, as repo-linked loans reprice quickly while ample liquidity limits pressure on deposit rates.

The Monetary Policy Committee (MPC) raised the policy repo rate by 25 basis points to 5.5% on Wednesday, its first rate hike in more than three-and-a-half years. The RBI also shifted its policy stance to “Calibrated Tightening” from “Neutral”, with the decision taken by a 4:2 majority.

Setty said bank loans are now broadly split between those linked to the marginal cost of funds-based lending rate (MCLR) and those linked to the external benchmark lending rate (EBLR). EBLR-linked loans respond more quickly to changes in the repo rate.

“Any repo hike will be immediately beneficial to the repricing of those EBLR loans,” Setty told CNBC-TV18.

He does not expect deposit rates to rise significantly in the near term, citing ample liquidity in the banking system and limited competition among banks for deposits.

“So, as you rightly said, I think the two quarters, maybe two to three quarters, are definitely beneficial in terms of the repo hike,” Setty said.

However, he said banks would need to monitor inflation, as depositors could seek higher returns to protect their savings from rising prices.

Higher rates may not hurt credit growth sharply

Setty said the repo rate hike by itself may not have a major impact on credit growth. Instead, inflation and inflation expectations would be more important in determining borrowing and investment decisions.

“If inflation remains as per the projections of the RBI, I don't think there will be a greater impact on credit growth,” he said.

Mortgages are among the more rate-sensitive loan segments because changes in interest rates can affect long-term equated monthly instalments. However, Setty said economic activity remained resilient and the next two quarters were expected to be busy periods.

The RBI expects consumer price inflation to average 5.8% over the next three quarters, including the current quarter, while core CPI is projected at 4.4% for FY27.

The central bank has also raised its FY27 GDP growth forecast to 7.1% from 6.7% earlier.

SBI sees no major system-wide asset quality risk

Setty said higher interest rates and the impact of El Niño could put some pressure on agricultural loans, but he does not expect a major deterioration in asset quality across the banking system.

“There could be some impact on the agricultural portfolio, but broadly, on the system level, I don't foresee major risks on asset quality,” he said.

He pointed to the banking system’s experience over the past three to four years, when asset quality remained resilient despite challenging conditions.

Some seasonal variation could emerge in agricultural credit quality, Setty said, but major asset-quality issues have not been seen in retail portfolios at SBI or across the banking system.

SBI welcomes account aggregator interoperability

Setty also welcomed the RBI’s move towards interoperability between account aggregators.

Banks currently integrate separately with individual account aggregators, he said, making interoperability a positive development. However, the industry will need to address issues around consent management and how frequently customer information can be accessed.

Setty said these issues were being addressed through the self-regulatory organisation for account aggregators.

Technical committee could improve RBI-market dialogue

Setty also backed the RBI’s decision to set up a technical consultative committee to maintain a more structured dialogue with market participants.

He said the RBI already engages with market participants through periodic discussions, but the new committee could provide a more formal mechanism for consultation and assessment.

“We have to see the terms of reference, but it would be a very structured mechanism and a periodical assessment,” Setty said.

The committee could also engage with a wider group of market participants, he added.

For now, Setty said banks would need to monitor how liquidity is absorbed and how inflation evolves over the next two to three quarters before assessing the impact on deposit rates.