Rates for lending, deposit all set to increase

Banks are in a hurry to increase their lending rates after the Reserve Bank of India (RBI) on Tuesday raised the repo rate, at which it lends to banks, by 50 basis points to eight per cent. Deposits rates are also set to go up but at a slower pace compared to lending rates, bankers said.

“Interest rates will go up...very quickly,” HDFC Bank Managing Director Aditya Puri said.

Even RBI Governor D Subbarao said banks had told him rate rises would be “more rapid than in the past”.

In fact, private sector YES Bank increased its lending rates by 50 basis points from on Tuesday. The bank's base rate, or the minimum lending rate, is now revised to 10.25 per cent, while its benchmark prime lending rate has been raised to 19.5 per cent.

“Banks will swiftly transmit this (policy) rate increase to the real economy via increased borrowing and lending rates,” said Citi India Chief Executive Officer Pramit Jhaveri.

High lending rates have also cast a shadow on banks' credit expansion plans for this year. RBI on Tuesday revised its credit growth target for the industry to 18 per cent for 2011-12 from the earlier 19 per cent.

Base rates of 47 major banks in India, which account for 98 per cent of bank credit in the country, have increased by 50-125 basis points in the past few months. Credit growth for the industry so far has been around 20 per cent from a year ago.

“If you look at year-to-date numbers, credit growth is negative since March. Therefore, going forward, while the expectation of credit growth will be 18 per cent, one has to wait and see if there is credit demand. The demand till now is coming from existing projects, which are under implementations. But new projects are not being taken up. So, credit growth is expected to be muted,” said M D Mallya, chairman and managing director of Bank of Baroda.

The increase in lending rate hikes will be accompanied by hike in deposit rates. According to bankers, the rates are likely to rise more for short-term maturities than for deposits with longer tenure.

“In deposits, banks will have an issue in competing with others. on Tuesday, insurance companies and mutual funds are also competing in the same space. We have liquid funds giving a rate of 8.50-8.75 per cent. If we keep our rates low, we will be bypassed for deposits,” said Pratip Chaudhuri, chairman of State Bank of India, the country's biggest lender.

Most bankers, however, said they would be more aggressive in raising rates on their loans than deposits to protect their interest margin.

“If loan rates go up, deposit rates will go up...Fundamentally, for Basel III banks will require more equity and lesser amount of Tier II capital. When you need equity, you obviously should have the ability to service it,” HDFC Bank's Puri said.

Borrowing cost not reflected in cos’ books

Even as RBI raised the repo rate by 50 basis points today, BS research reveals the increase in the cost of borrowing has not been reflected in the profit and loss accounts of small and medium enterprises (SMEs). The study of 426 SMEs reveals the average cost of borrowing, at 7.80 per cent in 2010-11, declined 25 basis points over the average cost of 8.05 per cent in 2009-10. The interest cost-to-debt was higher at 8.32 per cent in 2009-10, and before the current upward revision, it was around 6.80 per cent.

BS Research Bureau