Banks to raise rates, lower growth targets

MONETARY POLICY REVIEW

Banks appear set to increase lending rates by around 50 basis points. But deposits rates may go up by a smaller magnitude.

The asset-liability committees (Alco) have already got into the act with State Bank of India, the country’s largest lender, deciding to convene a meeting of key executives within hours of the Reserve Bank of India’s announcement. IndusInd Bank and ABN Amro’s Alco’s are due to meet tomorrow, while Central Bank of India said it will announce a decision by Friday.

Bank of India Chairman & Managing Director TS Narayanasami said he expects lending rates to rise at least 50 basis points but added that a final decision may take two-three weeks.

The country’s second largest mortgage player LIC Housing Finance, which raised its prime lending rate to 14 per cent on June 30, said it will wait for a month before taking a final call. The company’s chief executive R R Nair said the impact will be less than 50 basis points.

For banks, the cost of funds will rise on two counts. One, the 50 basis point increase in repo rate will make borrowings from RBI under the liquidity adjustment facility window more expensive. Two, the 25 basis points rise in cash reserve ratio from August 30 will imply that a higher proportion of deposits will be impounded and turn non-interest bearing.

There may be more impact on the investment portfolio of banks as the the yields on government paper hardens further due to the repo rate increase. "This is one of the biggest worries not just for us but for the entire industry," said Meera Sanyal, Country Executive - India, ABN Amro NV

While the timing of the decision to raise rates may vary, bankers are unanimous in saying that margins will come under fresh pressure.