By ICICI Direct
External benchmarking: Lands faster than expected. In a move to improve interest rate transmission, RBI has mandated banks to link their lending rates for retail, MSME and personal segment to external benchmark from October 1.
Other key highlights of the circular are: (1) External benchmark such as repo rate, three & six-month treasury bills & any other Financial Benchmarks India (FBIL) to be allowed
(2) Banks free to offer external benchmark linked loan to other borrowers.
(3) Banks free to decide spread but risk premium to change only if credit assessment deteriorates
(4) Interest rates to be reset at least once in three months
(5) Existing loans and credit limits linked to the MCLR/base rate/BPLR shall continue till repayment or renewal
(6) Existing floating rate loans eligible for pre-payment without charges could migrate to external linked loan.
Our view: Banks with larger proportion of floating rate retail & MSE loans are likely to be impacted. Housing loans segment is particularly the most impacted as they are floating rate and have no pre-payment charges. Largely, private banks are to be most impacted as transmission by private lenders was limited.
Axis Bank and SBI, which have significant housing portfolio and existing book conversion, can impact margins. This will lead to overall pressure on margins for banks with high retail floating loans.
Kotak Mahindra Bank, IndusInd Bank and HDFC Bank have higher non-housing retail portfolio, where floating proportion will be lower. On the liabilities side, banks will likely link saving/bulk term deposit with external benchmark (repo rate) to address pressure on margins thereby matching interest rate risk on asset side.
HFCs will be more impacted as we expect HFCs to match the bank under competitive pressure. Their costs will not be declining in line with loan rates and thereby margins can be in pressure for both LIC housing finance (retail loans-93%) and HDFC (71%). Hence, within our coverage universe, we downgrade both LICHF and HDFC to ‘Reduce’ from ‘Hold’ earlier.