When a central bank raises interest rates, commercial banks lending practices are affected in following several ways:

1. Cost of fund increases: The central bank’s interest rate hike means that the cost for commercial banks to borrow money rises. This money can be borrowed from either central bank or from other sources. This increased cost of funds is often passed onto borrowers in the form of higher interest rates on loans.
2. Higher borrowing costs for consumers and businesses: As commercial banks raise their lending rates, borrowing becomes more expensive for consumers and businesses. This can lead to decrease in loan demand for things like personal and business loans and mortgages because higher interest payments make loans less affordable.
3. Credit tightening: With higher interest rates, the risk of default may increase because borrowers are jow facing repayment costs. Commercial banks may respond by tightening their credit standards, making it more difficult for some borrowers to qualify for this loan.
4. Impact on bank profit margins: While higher interest rates can lead to higher interest income for banks, the spread between what banks pay on deposits and what they earn on loans might not increase proportionately. If deposit rates rise significantly, this can squeeze bank profit margins.
5. Shift in loan portfolio composition: Banks may shift their focus toward more secure, less risky lending opportunities.
6. Decrease in loan volume: The combined effect of higher borrowings costs and tighter credit standards generally leads to a reduction in the overall volume of loans issued by banks. This reduction can slow down economic activity since consumers and businesses may reduce spending and investment.
7. Impact on economic growth: A central bank raises interest rates primarily to control inflation but the side effect is a slowdown in economic growth due to reduced borrowing and spending. Commercial banks in turn adjust their strategies to align with the slower economic environment, potentially focusing more on maintaining asset quality and managing risk rather than aggressive lending.