Lending rates may go up from Oct

To review base rate by September-end, bankers tell RBI.

Banks are likely to start raising lending rates at the end of September as they review their base rates.

In the post-policy meeting with the Reserve Bank of India (RBI) Deputy Governor Usha Thorat, the bankers said they would review their base rates by the end of the quarter. This would be the first time the base rates would be reviewed after they were introduced from July 1.

The base rate system replaced the benchmark prime lending rate (BPLR) regime. According to RBI guidelines, banks will have to review base rates once a quarter. The new regime is aimed at bringing more transparency in pricing of risk and making transmission of monetary policy more effective. Banks cannot lending below the rate, except to a few categories.

While most banks started increasing deposit rates at the start of this quarter, a review of lending rates is necessary if banks have to protect net interest margins.

RBI also signalled a rise in rates by increasing key policy rates in its first quarter review of the annual policy in June-end. It also expressed concern that credit growth had far exceeded deposit growth and so banks needed to make deposits attractive and keep the asset liability gap in check.

Till the year to July 16, credit growth was 21 per cent while deposit growth was 14.5 per cent. RBI has projected 20 per cent credit growth and 18 per cent deposit growth for the current financial year.

But bankers said strong credit growth in the first quarter was due to demand from telecom companies for airwave auctions, a oneoff event, and real credit pick-up was yet to happen. Banks expect credit to pick up from October as the ‘busy season’ kicks in.

The base rate of most public sector banks is eight to8.25 per cent. State Bank of India has fixed the rate at 7.5 per cent. Most private sector banks’ base rate is 7-7.5 per cent.

Recntly, most public sector banks have increased benchmark prime lending rates. This was seen as an attempt to force customers under the BPLR regime to shift to the base rate by making BPLR-linked loans expensive.

Banks have asked RBI to put a sunset clause for BPLR-linked loans. Tough RBI has said it is looking into the legality of issuing such a fiat, it has at same time told banks to take steps to attract existing customers to the new regime.