A rise in interest rates does not affect all banks in the same way. The impact depends on how quickly banks adjust their lending rates, the cost of their deposits, and the types of loans they offer.
In an article for Outlook Money, Dr Arindam Banerjee, Professor (Finance) and Program Director of the Master of Applied Finance & Wealth Management (MFWM) program at SP Jain Global, explains how the Reserve Bank of India’s repo rate hike could affect banks differently.
He highlights that private banks with a larger share of repo-linked loans and a strong base of low-cost deposits may initially benefit from the rate hike. Since lending rates can adjust faster than deposit rates, these banks may see their interest income rise before their funding costs increase.
Public sector banks may experience a different impact, as many have a larger share of loans linked to the Marginal Cost of Funds-based Lending Rate (MCLR), which adjusts more gradually. Banks that rely on higher-cost deposits or have a greater share of fixed-rate loans may also face pressure on their profit margins.
The article explains why investors should look beyond the rate hike itself and pay attention to factors such as deposit costs, loan growth and the quality of banks’ assets when assessing the impact on their financial performance.
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