After RBI review, banks raise their base rates

After the Reserve Bank of India (RBI) raised key policy rates by 50 basis points (bps), lenders have started raising their base rates (the benchmark rates for all loans).

Punjab National Bank (PNB), Oriental Bank of Commerce (OBC) and YES Bank today raised their base rates. PNB, the country's second-largest bank, increased its base rate by 50 bps to 10 per cent, citing an increase in the cost of funds. Expect to a few specific sectors, banks are not allowed to lend below the base rate.

A senior State Bank of India (SBI) official said a rise of 50 bps in the savings rate (4 per cent) would mean an additional interest payment burden of Rs 1,600 crore for the bank. This would put pressure on interest rate margins. As a result, there could be a rise of at least 50 bps in lending rate. The share of savings bank deposits to SBI's total deposits is about 22 per cent.

Chennai-based Indian Overseas Bank said a 50-bps rise in lending rate is on the cards.

PNB said it expected the cost of funds to increase further. “RBI measures are expected to raise the cost of funds for the bank, both in the current quarter as well as the forthcoming quarter. For better transmission of policy measures announced by RBI, PNB has decided to hike the benchmark prime lending rate (BPLR) and the base rate by 50 bps each to 13.5 per cent and 10 per cent, respectively,” the bank said. The BPLR was earlier adhered to for the pricing of loans. This was replaced by the base rate in 2010.

On deposit rates, PNB Chairman & Managing Director, K R Kamath, said, “The bank would review deposit rates depending on how credit growth picks up in the coming months.”

While OBC raised base rate by 50 bps to 10 per cent, private sector lender YES Bank increased the base rate and prime lending rate by 50 basis points each to 9.5 per cent and 19 per cent, respectively. IDBI Bank had, yesterday, raised its base rate and prime lending rates by 50 basis points each. The public sector lender also raised its deposit rates by 25-50 basis points across various categories.

Indian Overseas Bank Chairman and Managing Director, M Narendra, said considering the monetary tightening, there could be an increase of at least 50 basis points in the base rate. The bank would decide on raising lending rates in the next few days. The bank’s base rate currently stands at 9.5 per cent, while BPLR is 13.75 per cent. “A rise in the lending rate should help us earn more interest income and protect the net interest margin above 3 per cent in 2011-12. The deposit rates are unlikely to be raised at this point,” Narendra said.