Banks set to increase lending rates

The increase in policy rates by the Reserve Bank of India (RBI) today leaves banks with no choice but to pass these on. Bankers will increase their lending rates in order to protect their margins.

RBI today raised the repo rate, at which banks borrow from the central bank, by 50 basis points to 7.25 per cent, thereby making funds costlier for banks. In turn, banks will also rise their base rates which will make loans dearer. Also, the equated monthly installments (EMIs) in case of loans already taken are set to go up.

“EMIs will go up. I don’t know when and how much (rate hike) each bank will do. If one is not expecting them to go up, then he’s dreaming,” said Aditya Puri, managing director, HDFC Bank.

Speaking to reporters after an interaction with RBI, bankers said the impact of the policy rate rise on the interest rates could be in the range of 50-100 basis points.

“We should remember that the impact of earlier policy rate hikes have not been fully transmitted yet and today policy rates have been hiked further. This will lead to increase in lending rates. I suppose what most banks will do is maintain their margins and a large part of the increase will have to be passed on to the consumers in the form of rate hikes,” said Chanda Kochhar, managing director and chief executive officer, ICICI Bank.

RBI had raised policy rates eight times in the financial year 2010-11, to which banks responded with at least three rounds of base rate increases.

Pratip Chaudhuri, chairman of State Bank of India (SBI) that recently raised its base rate by 25 basis points, said the bank might review its lending as well as deposit rates by the end of May, 2011 after assessing the impact of the earlier rate rise. SBI’s base rate is at 8.5 per cent currently, which is still one of the lowest as compared to other lenders.

IDBI Bank was the first to respond to the rate hike with an increase of 50 basis points in its base rate as well as benchmark prime lending rate (BPLR). “In response to an increase in the cost of funds, where deposit rates have been increased and keeping in view the market conditions, IDBI Bank also reviewed its base rate and BPLR and decided to increase both,” said the government-run bank in a statement.

IDBI Bank’s base rate will be at 10 per cent and BPLR at 14.50 per cent from May 5, 2011. In addition, the bank has also increased interest rates on retail term deposits in some maturities by 25-50 basis points.