State Bank increases PLR by 50 bps to 11.5%

Home loan, personal loan and corporate customers of State Bank of India (SBI) will have to pay more interest as the country's largest bank is raising its prime lending rate (PLR) with effect from tomorrow.

SBI, at its board meeting in Kochi today, decided to hike its benchmark PLR by 50 basis points to 11.50 per cent, the third increase in its benchmark rate since May 2006.

The immediate triggers for the upward revision in lending rates by SBI are a 25-75 basis points increase in interest rates on term deposits and the Reserve Bank of India's (RBI) further monetary tightening earlier this month.

The RBI raised the cash reserve ratio (CRR) by 50 basis points to 5.5 per cent from January 6 amid fears of overheating in the fast expanding economy.

"The cost of funds have gone up due to an increase in deposit rates, plus the hike in CRR means the bank will have to keep higher balances with the central bank, which do not earn any interest. The bank has to protect its net interest income and also net interest margin," SBI Managing Director, T S Bhattacharya, said.

All other public sector banks are expected to follow SBI in raising their lending rates. Oriental Bank of Commerce was the first public sector bank to increase its PLR. ICICI Bank, the second largest bank, raised its PLR by 50 basis points to 13.75 per cent with effect from December 18.

SBI had raised its PLR twice earlier in this financial year. It raised its PLR in May 2006 by 50 basis points to 10.75 per cent and again in August 2006 by 25 basis points to 11 per cent.

SBI's cost of deposits was 4.51 per cent in September 2006 down from 4.64 per cent a year ago. The bank's net interest margin was 3.32 per cent against 3.12 per cent a year ago.