New RBI measures could make car, bike loans costlier

The Reserve Bank of India (RBI) on May 4, 2022 announced a few steps to control liquidity in the country and keep a check on inflation. As a consequence of these steps, vehicle and personal loans could get more expensive.

• Car and bike loans could get pricier
• Floating rate EMIs are likely to increase
• Borrowings for used cars may cost more

The RBI has hiked the repo rate by 40 basis points to 4.40 percent and increased the Cash Reserve Ratio (CRR) by 50 basis points to 4.50 percent. In simpler words, the central bank has increased the rate at which it lends money to commercial banks across the country, and has also increased the mandatory reserve of total liquid assets of commercial banks, which they have to park with the RBI.

What this implies is that to recover the higher rate they’re paying the RBI, commercial banks are most likely to drive up interest rates on loans to end borrowers. The higher CRR could make commercial banks hold on to their pockets tighter, and reduce the overall loan approval ratio. Meanwhile, for the common man, all types of borrowings could get more expensive and banks may not give out loans as easily as they did.

Shifting focus to the automobile sector, not only are new car and bike loans likely to cost more due to higher interest rates, but so will personal loans on used vehicles. The salaried class looking to dodge the immediate impact of higher equated monthly installments (EMI) on their borrowings could opt for a longer tenure than they had originally planned. However, while this will soften the impact on their overheads in the short run, it will prove to be more expensive in the longer run.

The automobile industry today is plagued with several issues, particularly those related to supply constraints as well as higher input costs that have severely impacted new car prices across manufactures. And at a time when country-wide fuel prices are at an all-time high, this news of higher interest on loans only gives buyers one more solid reason to defer their new vehicle purchase.