'Further rate hikes may hit offtake'

Any further escalation in interest rates from the current elevated levels is seen hurting banks, even as expectations are growing that the Reserve Bank of India (RBI) would again tighten monetary policy at its review slated for the end of this month.

"Any further increase in (lending) interest rates may not be in the interest of the business (of banks)," Union Bank Chairman and Managing Director M V Nair said on the sidelines of a seminar on payment systems in banks.

The fear of another round of interest rate hikes hurting banks follows a slowdown in demand for home loans, which, to a great extent, had led the unprecedented growth in bank credit expansion in the last three years.

Along with State Bank of India (SBI) and ICICI Bank, Union Bank of India too has experienced a slowdown in home loan demand because of the increase in lending rates and manifold spurt in property prices.

Nair said non-triple-A rated corporate clients face the prospect of having to pay interest rates of 15 per cent and more, from around the levels of PLRs now.

Such high rates could impact profitability of corporates and put a question mark over the affordability of bank funds. Individuals could be postponing decisions on purchasing homes hoping for a sharp correction in property prices.

"However, this does not mean banks will take conscious steps to reduce credit activity. Lending is the basic activity which banks will pursue where ever they find opportunity," he pointed out.

Commercial banks have raised their PLRs by up to 150 basis points in three tranches in the current financial year.

The latest round of PLR hikes, the third one, was triggered by the RBI's decision in early December to raise cash reserve ratio (CRR) by 50 basis points to 5.5 per cent to contain inflationary expectations.