Bank of Baroda flip-flopped on lending rates, giving up its  policy of bringing down home loan pricing in a matter of days after the Reserve Bank of India (RBI) hiked the repo rate.

On 22 April, the public sector bank was an outlier. It decided to lower its interest rates on home loans by 25 basis points to 6.50% for a limited period till 30 June, which was one of the lowest in the market.

This decision was in contrast to the approach of some of the banks who lifted rates. The RBI, after all, had indirectly raised interest rates in the system through the standing deposit facility (SDF). The RBI placed the SDF at 3.75% as the floor price for banks to park money with the central bank. Earlier, the variable reverse repo rate (VRRR) at 3.35% was the floor price.

The market caught the signal and the rates on the shorter end started moving up. Senior bank executives said that even if headline rates remain where they are, they will increase risk premiums. The largest non-bank home financier, HDFC Ltd, raised its home loan rates by 5 basis points.

Then on 4 May Govenor Shaktikanta Das hiked the repo rate by 40 basis points to 4.40% and said the cash reserve ratio (CRR) would go up by 50 basis points to 4.5% from 21 May. This unscheduled announcement stunned the market.

On 5 May, Bank of Baroda was the first to revise the external benchmark linked lending rate for its home and car loans.  For retail loans, the bank said the applicable Bank of Baroda repo linked lending rate would be at 6.9%, up from 6.50%.

So, did Bank of Baroda misread the market? "Definitely not,” said HT Solanki, Bank of Baroda general manager in charge of mortgages and other retail assets. “Even now our home loan rates are lower than our peers. We had reduced the rate in April so that home loans can grow, particularly in an environment when credit was not growing in other sectors.”

With a mortgage loan outstanding of Rs 80,000 crore there is definitely room to grow. But the demand for first time home buyers is down, RBI data showed. At the end of March 2022, home loans were growing only at the rate of 6.4% over the previous year. In the same time last year, the annual growth was at 9.6%.

Bank of Baroda’s interest rate on new home loans will now range between 6.90% and 8.25%, depending on credit scores.  The interest rate for new car loans will range from 7.40% to 10.65% and pre-owned cars from 9.40% to 12.40% while two-wheelers will be at 11.40%.

“There is an elasticity in the interest rates beyond which the bank cannot do much. When the SDF was set up, the bank had a leeway to have concessional rates for retail loans. But with the RBI hiking the repo and also the CRR, the elasticity to hold on to the lower rates went out. Still, the bank’s rates are very competitive,” said Bank of Baroda head of treasury Sushanta Mohanty.

Bank of Baroda still runs its special home loan scheme by waiving off the processing fees and legal charges until June-end. “But we needed to change the interest rates due to the developments in the external environment. A steep hike in repo and CRR is huge pressure for the entire banking system. We had to raise lending rates,” said Solanki.