If you are seeking either a home or car loan, you’d be pleasantly surprised to know both are equally expensive. The ruling rates for home loans is about 8.75 per cent tending to nine per cent. For a car loan, at best, you may have to shell out an extra 50–75 basis points. For borrowers, despite being in an increasing interest rate regime, this is a steal because five years ago a car loan would have costed you 150-200 bps more than a home loan.

Even when the repo bottomed out at four per cent, the difference between the two loans averaged an upwards of 125 bps across banks. Home loans now are benchmarked against the repo, whereas car loans (or most non-home loan products) are benchmarked to the MCLR. By basing the loans differently, banks have the leeway to play around the pricing, especially on MCLR-linked loans. This allows them to respond better to the market demands and, accordingly, grow the loan books. What’s giving banks more comfort is the easing asset quality position.

With the quantum of provisioning reducing and the loan losses gradually declining, it leaves banks with better yield, even if the rates haven’t been jacked up in tandem with the cost of funds. And increasingly, with banks pricing the products than customers, especially on the retail side, the favourable asset quality position is supporting this stance.

How long can this party last? Macro fundamentals remain favourable, and there is enough money in the hands of people. With elections spread across States and eventually at the national level in about a year, the overall market buoyancy may not be disrupted much. But banks are already bracing for lower than FY23 loan growth, and first signs of that is pretty much visible on the mortgages front, where the rate hikes are supposedly weighing on the demand for housing projects. NPA ratios optically look better today partly because of the strong loan growth.

If the denominator support wanes for any reason, it would have a ripple effect on the health of banks. That’s something which the RBI would not want at this juncture. Is this perhaps another reason why it decided to defy its global peers and take the unexpected pause in repo hikes? Answers will emerge from how the restructured accounts behave because FY24 will be a litmus test for them. After all, no one would want an uninvited guest to ruin all the efforts taken by the RBI in fighting the pandemic.