Silently done: Interest rates on personal, auto loans tweaked up

How much interest are you paying on your auto loan currently? Not a rhetorical question, this, because your bank ought to have informed you by now that you will have to pay more, surely? Not really, if you read until the end.  

The hike has been a quiet one, as a report in the Times of India points out. Simply put, the interest rates on select retail loans, excluding home loans, have been tweaked upward, with several banks revising their marginal cost of lending rate (MCLR).

Why have home loans been excluded? The answer is that home loans are linked to the repo rate (the rate at which the Reserve Bank of India or RBI lends), which has been constant since February 2023. However, many other loans are not linked to the repo rate.

The report states that the State Bank of India (SBI), which offered auto loans starting from 8.65 per cent until December 2023, has now raised the starting rate to 8.85 per cent for clients with high credit scores, in other words, customers who have displayed responsible credit behaviour in the past.

Following in the SBI’s footsteps, several other banks have also increased their personal loan rates. Bank of Baroda, for example, which was charging 8.7 per cent on auto loans last month, is now charging 8.8 per cent and has reintroduced its processing fees, which were waived during the festive season.

The Union Bank of India, too, has hiked rates on auto loans and some of its personal loans by revising the spread over the external benchmark. The public sector lender now has car loans starting at 9.15 per cent as against 8.75 per cent earlier, states the TOI report.

IDFC First Bank has increased interest rates on personal loans from 10.49 per cent in November 2023 to 10.75 per cent, while Karnataka Bank has hiked personal loan rates from 14.21 per cent to 14.28 per cent during the same period.

If a bank executive who spoke to TOI is to be believed, lenders were waiting for the festival season to end before revising rates.

In end-December 2023, a Mint article pointed out how credit operations within India’s banking sector had witnessed a significant spike in the second quarter of the financial year 2023-24, citing recently disclosed CRIF-FIDC data, which showed that personal loans amounting to nearly Rs 65,000 crore had been disbursed by non-banking finance companies (NBFCs), easily surpassing other categories such as “auto loans, education loans, gold loans, and healthcare financing”.

These encompassed such retail loan categories as mortgages and personal loans, as well as corporate loans for infrastructure and manufacturing. In short, banks were extending more credit than at any previous point.

Interestingly, in October 2023, RBI governor Shaktikanta Das had warned against the risks of “very high growth” in personal loans, and urged lenders to both strengthen their internal surveillance mechanisms as well as “address the build-up of risks”.

The context for his comment was recently released RBI data, which showed that personal loans grew by 30.8 per cent in August 2023 compared to 19.4 per cent a year ago, a huge jump. Total credit to the segment stood at Rs 47.7 trillion in August, from Rs 36.47 trillion the previous year. By the end of the year as per CRIF-FIDC data, personal loan growth had spiked to 32 per cent.

Are banks required to inform you of this hike in interest rates? Not if you have taken a loan on ‘floating rate of interest’. This was the observation in December 2022 by the National Consumer Disputes Redressal Commission (NCDRC), in a dispute between ICICI Bank and a customer.

NCDRC presiding member Dinesh Singh and member Karuna Nand Bajpayee had set aside a state consumer court order that had held to the contract and said, “A bank can increase or decrease the rate of interest under the floating rate of interest provided for in the loan agreement executed between the bank and the complainant and any additional or further consent from the complainant was not required, the same having been agreed to in the loan agreement itself.”