RBI Move Impact: ICICI Bank hikes rates by 1%

Banks have embarked on another round of increase in lending rates following the Reserve Bank of India (RBI) move on Friday to tighten the monetary policy for the third time in four months.

ICICI Bank, the leading player in the home and other retail loans market with about 30% incremental market share, has taken the lead and increased its lending rates for both individuals and companies by 100 basis points, while the asset-liability committees (ALCO) of most public sector banks are expected to meet next week to take a view on interest rates.

ICICI Bank raised its floating reference rate (FRR) by 1 percentage point to 12.75%. FRR is the benchmark rate to which home loans are linked. The largest private sector bank has also increased its benchmark advance rate (I-BAR), the rate to which all corporate loans are pegged, to 15.75% from 14.75%.

Customers who availed of loans from ICICI Bank in the past at interest rates as low as 7.50% have seen a sharp increase in equated monthly instalments (EMIs) over the past one year during which interest rates have gone up by around 400 basis points.

A customer who had borrowed at 7.50% with EMI of Rs 899 per lakh for 20 years will see the EMI rise to Rs 1,201 per lakh considering the applicable interest rate has risen to 12%. ICICI will now lend floating rate loans at 12% and fixed rate loans at 14%.

ICICI Bank has a home loan portfolio of around Rs 60,000 crore of which about 90% is at floating rate. Other banks and housing finance companies are expected to follow suit though the quantum of increase is likely to be up to 50 basis points. 

The RBI increased its overnight lending rate (repo rate) by 25 basis points to 7.75%. Additionally, the central bank also increased the cash reserve ratio (CRR), the proportion of funds that banks need to keep with the RBI, by 50 basis points in two states effective April 14 and April 28 to 6.50%.

"The hike in rates have been triggered by a rise in cost of funds as well as the recent hike in the repo rate and cash reserve ratio. The liquidity situation continues to be tight. We had increased our deposit rates this month but had left lending rates untouched. Hence, this move will enable us to pass on the increase in costs,'' Rajiv Sabharwal, senior general manager, ICICI Bank, said.

The latest round of interest rate hikes has bankers worried on the quality of portfolios as it is likely to nudge up the default rates. A senior SBI official said, "We would have to raise rates. There may be some exemptions like education and mortgage loans. Asset quality is now an issue.''

ICICI Bank's Sabharwal said, "We have not seen any increase in default rates as the income levels of customers and asset prices have gone up sharply in the last few years. Property prices have risen by almost 50-100% in the last two years. Even if we see a correction of 5-10%, it is not a cause of concern.''

Public sector banks are likely to decide on lending rates next week, but officials at these banks clearly see lending rates going up by around 50 basis points.  "We will have an ALCO meeting next week. There is an upward pressure on rates. The signal is clear - the cost of money should and would go up. RBI is trying to ensure there is no hard landing. It increased risk weights and provisioning to cushion any adverse impact on banks. We will have to consider the ability of the borrower to pay and how much the system can absorb. Net interest income cannot be negative on an incremental basis," said the chairman and managing director of a south-based public sector bank.