RBI’s rate hike decision may impact credit demand: Setty

Mumbai: A shift in the cycle to rate hikes may impact credit demand from consumption or discretionary segments, but is unlikely to dent retail asset quality at the system level, State Bank of India Chairman CS Setty said on Monday.

Setty, who also chairs the banking industry grouping IBA, said SBI expects another 0.50 per cent rate hike at the RBI's December policy review and a pause at the February 2027 policy meeting.

"If a couple of rate hikes are going to be there, the discretionary consumption demand and the consumption credit will be impacted," Setty said at the annual Business Standard BFSI Insight Summit here.

Pointing to the robust 7.1 per cent growth expected this fiscal year, Setty said the demand from productive sectors is unlikely to be impacted. Earlier this month, the RBI hiked rates by 0.25 per cent, marking the first such tightening move in over three years due to inflation risks.

The central bank also shifted its policy stance to calibrated tightening from neutral, and minutes of the meeting released last week made many analysts reaffirm the possibility of more hikes in future.

When asked about the impact on asset quality, given that a large proportion of loans are now tied to external benchmark-linked rates, which get repriced immediately after RBI interest rate hikes, Setty said there is no cause for fear regarding retail credit quality at the system level.

"Broadly from a system-level perspective, I don't think we should be really worried about the asset quality on the retail front," Setty said, acknowledging that some leveraged borrowers may find it difficult to face a 0.75 per cent hike in interest rates.

Setty welcomed the proposal to charge a merchant discount rate on UPI transactions, pointing out that it will support investments by the banks in the infrastructure and also the risk engines, which work alongside.

IBA is working with all stakeholders to ensure the customer is not forced to pay a higher rate to merchants because of MDR on UPI, he added.

Setty said the bank is working on a new version of its popular Yono mobile application, which will be targeted at over 17 crore Jan Dhan account holders in its overall depositor base of 53 crore.

Christened as 'Yono Bharat', the new version will be available in another one year, Setty said, adding that it will help take the overall user base of the Yono platform to 30 crore by 2030 from 11 crore at present.

It is very beneficial to serve customers digitally for the bank, Setty said, pointing out that a digital transaction costs just Re 1 against over Rs 40 for a branch visit.

Amid a widespread conversation around the use of artificial intelligence and its impact on jobs, Setty said deploying the new-age platforms is also not cheap.

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The Hans India