The ongoing interest rate hikes didn't really cause additional debt burden with overall interest costs for outstanding borrowers remaining below pre-pandemic levels, according to a new study.
The economists at the Bank of Baroda (BoB) found that borrowers received an interest cost reduction benefit of Rs 1.75 lakh crore during the rate easing cycle between March, 2020 and April, 2022. However, following the subsequent rate hikes since May 2022, interest costs on outstanding credit rose only by Rs 0.33 lakh crore in FY23 over FY22. If rate transmission gets completed in coming months, interest costs will likely touch the pre-pandemic levels this fiscal, it observed.
The study captured the two recent monetary policy cycles – one during the pandemic and the other post May 2022, to see how interest costs for borrowers were spaced out in consonance with the movement of repo rate.
For computational purposes, it made two primary assumptions. Credit outstanding of Rs 101.05 lakh crore as on February, 2020 was taken as the base, with a caveat that some loans might have been repaid and fresh loans might have been repriced to the corresponding fresh Weighted Average Lending Rate (WALR).
Two, interest costs were calculated every month by applying that month’s WALR on the above mentioned base credit of February 2020. In other words, the outstanding credit was held as a constant, while the interest rates were changed according to the WALR.
It should be noted that RBI eased rates dramatically when the pandemic began in March, 2020. Repo rate hit a record low of 4% and WALR saw more than complete pass through of 133 bps on outstanding loans by April, 2022.
Consequently, interest costs for the base year FY20 before the pandemic translated to Rs 10.16 lakh crore based on a WALR of 10.05% on outstanding credit of Rs 101.05 lakh crore. With easing of policy rate, interest costs fell to Rs 9.55 lakh crore in FY21, resulting in a straightaway reduction of interest cost burden of Rs 0.61 lakh crore.
Notably, repo rate was reduced by 40 bps (115 bps from March, 2020) and the outstanding WALR saw a drop of 82 bps during the same period (95 bps if March 2020 is included). In FY22, interest costs fell further to Rs 9.02 lakh crore, translating to reduction in borrowing costs of Rs 0.53 lakh crore from FY21 and Rs 1.14 lakh crore compared with FY20.
In FY22, repo rate was retained at its lowest level of 4%, whereas outstanding WALR was reduced further by 36 bps. Therefore a total of Rs 1.75 lakh crore was being saved by all borrowers annually via interest costs reduction by FY22.
Coming to the rate hike cycle starting May 2022, repo rate rose by 250 bps. In FY23, as a response to the tightening cycle, WALR increased by 98 bps and interest costs rose to Rs 9.35 lakh crore from Rs 9.02 lakh crore in FY21, an increase of Rs 0.33 lakh crore.
Even if interest costs in FY23 rose, the total payout at Rs 9.35 lakh crore is higher than FY22, but much lower than FY20. Therefore, even as RBI hiked repo rate by 250 bps, borrowers were still not worse off compared to pre-pandemic times.
In FY24, interest costs in the first 5 months till August, 2023 stood at Rs 4.13 lakh crore, with outstanding WALR rising by 10 bps. For rest of the fiscal, BoB reckons interest costs at existing WALR on outstanding loans. If so, interest costs will likely go up to Rs 9.91 lakh crore, which again is Rs 25,000 crore lower than Rs 10.16 lakh crore in FY20.
Thus the study concluded that repo rate hikes and the subsequent rate transmission has still not pushed interest costs to pre-pandemic levels. There's still room for upward movement in WALR, which will likely keep interest costs of borrowers at the pre-pandemic level.
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