Mixed reponse from banks on RBI's interest rate advice

Fixed deposits will now earn more interest after banks responded positively to the RBI's advice to hike interest rates, but their refusal to reduce lending rates means that borrowers will not see their EMIs come down.

In fact, the country's largest private lender, ICICI Bank, has not only raised deposit rates, but will also revise lending rates from tomorrow, which means borrowers will have to pay higher EMIs.

Earlier, HDFC Home Finance had also raised lending rates.

At the annual Bancon 2010 banking conference in Mumbai, RBI Governor D Subbarao had asked bankers to hike deposit rates and lower the interest charged on loans with a view to raise the level of national savings, as well as encourage the investment required for double-digit growth.

"To achieve our collective aspiration of double-digit and inclusive growth, we need to raise the level of national savings and channel those savings into investment... This means banks need to raise the interest rates offered to depositors and reduce the lending rates charged on borrowers," Subbarao had said.

While the net interest margins (difference between lending and deposit rates) of banks have fallen by 0.5 per cent over the last decade to 2.5 per cent now, they are still higher than those enjoyed by their peers in other emerging markets, even after accounting for expenditure on mandatory corporate social responsibility activities, the RBI Governor had said.

Instead of lowering lending rates, ICICI Bank has decided to increase the benchmark prime-lending rate and its Floating Reference Rate (FRR) for consumer loans (including home loans) by 50 basis points.

This means that customer will have to shell out Rs 500 every year to repay every lakh that they borrow.

The BPLR is used for determining interest rates on loans and advances sanctioned up to June 30, 2010, ICICI Bank said.

Customers that borrowed at fixed rates will not be impacted by the above increase and their contracted rates will remain unchanged.

With effect from July 1, 2010, the interest rate on new loans and advances, including consumer loans, is determined on the basis of ICICI Bank's base rate, which currently stands at 7.75 per cent.

Earlier, the country's largest housing finance firm, HDFC, raised its benchmark lending rate by 75 basis points, making home loans dearer for both existing and new borrowers with effect from December 1.

So far as deposit rates are concerned, ICICI Bank has decided to raise interest rates on fixed deposits of various tenor by 0.25-0.50 per cent.