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Rate hikes deal blow to growth

Aug 23 2013, 08:54 IST
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SummaryHome, auto loans to become more expensive as ICICI, HDFC raise base rate, retail PLR by 25 bps.

Companies and individuals will pay more for loans with ICICI Bank hiking its base lending rate by 25 basis points (bps) to 10% on Thursday. Home loans from HDFC will also become expensive as the housing major increased its retail prime lending rate by 25 bps to 16.65%. The hikes signalled that money has become dearer and that banks believe it could stay that way for a while.

State Bank of India (SBI) chairman Pratip Chaudhuri said his bank would not charge borrowers more. “We are not going to hike interest rates either for India Inc or for our retail customers. We would rather bite the bullet,” Chaudhuri told FE. The country’s largest lender — whose base rate of 9.7% is the lowest in the sector —

has maintained that it doesn’t see a case for raising rates given it has access to ample low-cost deposits.

Earlier this week, Axis Bank hiked its base rate by 25 bps to 10.25% following HDFC Bank, which upped it by 20 points to 9.8%. Shikha Sharma, CEO and MD, Axis Bank said: “The cost of money has gone up and so we have to pass that on to customers. Right now, visibility is poor; so, we’ll have to wait and see how the market behaves and adjust rates accordingly.”

An increase in the base rate means all customers, whether companies or individuals, pay more for their loans, assuming banks charge the same spread and that the loans were not contracted at a fixed rate.

A 25 bps rise in the base rate translates into an increase of Rs 320 in the equated monthly instalment on a loan of Rs 20 lakh with a tenure of 20 years. The increase in base rates is not surprising since, over the past few months, banks have been paying more to source funds given how the growth in deposits — especially cheaper Casa — has been sluggish; ICICI Bank, for instance, had raised deposit rates by up to 75 bps across select maturities late last week. Deposits grew at an anaemic 13% year-on-year in the fortnight to August 9.

More important, with the Reserve Bank of India (RBI) opting to tighten liquidity to fight a falling rupee — it fired the first salvo on July 15 hiking the interest rate on the marginal standing facility to 10.25% — banks are paying more for money in the wholesale market. Yields on certificates of deposit have risen by around 300 bps since early July; over the same time, the yield on the benchmark bond has risen by 80 basis points to 8.234%, although it had spike to 9.5% on Wednesday, with the bond market selling off. Consequently, companies too are paying more than they were a couple of months back — the yield on three-month commercial paper has jumped more than 400 basis points since July 2 to 12.2%.

Although loan growth rose to 16.7% year-on-year in the fortnight to August 9, offtake of non-food credit has stayed well below those levels in the past three months. Indeed, loan growth so far in FY14 has been under 3%, indicating weak demand.

ICICI Bank also raised its benchmark prime-lending rate (BPLR) and its floating reference rate for consumer loans, including home loans, by 25 bps, effective August 23. Last week, Kotak Mahindra Bank had also raised its base rate by 25 bps to 10%, while on July 31, Yes Bank raised it by 25 bps to 10.75%. In the case of non-banking finance companies too, the increased cost of funds has compelled lenders to charge more. Commercial vehicle financier, Shriram Transport, for instance, raised its lending rates on all fresh loans by 25-50 bps, across categories, starting August 1.

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