Banks fall in line: home, auto loans to be dearer

Written by Banking Bureau | Yogima Seth | Mumbai, New Delhi, Jul 30 | Updated: Jul 31 2008, 06:25am hrs
The inevitable has begun. A day after the Reserve Bank of India (RBI) hiked both the repo rate and the cash reserve ratio (CRR) in a sharper attack on inflation, banks have begun effecting steep increases in interest rates across sectorsmoves that will also curtail credit growth.

Kick-starting the rate hikes, Delhi-based Punjab National Bank, the countrys second largest state-run bank, on Wednesday raised its benchmark lending rate by a hefty 100 basis points from next month, making home, corporate, personal and auto loans much dearer.

The board has decided to increase PLR by 100 bps and deposit rates between 75 and 100 bps effective August 1. Margins are under pressure following the tight monetary stance of the central bank. In order to maintain profit margins, it was necessary to revise the rates, said KC Chakrabarty, PNBs chairman and managing director. The banks PLR, which stands at 13%, will go up to 14%.

In its first quarter review of Annual Monetary Policy, RBI on Tuesday had hiked the repo rate--the rate at which it lends short-term funds to banks--by a steep 50 bps and increased CRR--the portion of deposits banks must keep with the central bank at zero interestby 25 bps. RBI had also warned banks not to overstretch themselves and to keep lending in consonance with their sources of funds.

Significantly, in the last five months, interest rates on auto loans have been hiked three times and the fourth one, ranging between 50 and 100 bps, is due from next Monday thanks to RBIs moves.

We have no option but to tighten money supply as the cost of borrowing has gone up. Hence, we are increasing the interest rate by 50-75 bps with effect from Monday, confirmed Sumit Bali, chief executive officer of Kotak Mahindra Prime Ltd, a subsidiary of Kotak Mahindra Bank. Bali expects overall retail lending by banks to fall by 15-20%.

Interest rates on both retail as well as inventory funding will certainly have to go up by 50-100 bps in the next couple of days, added Rajan Pental, auto finance head, HDFC Bank. Interest rates on auto loans currently hover at around 14.5-14.75%, which will now end up at around 15.5% with the upcoming hike.

Mumbai-based private sector lender Axis Bank also announced a hike in lending rates by 50 bps on Tuesday, to be effective immediately. Partho Mukherjee, senior vice-president (forex & treasury) at Axis Bank, said, The hike is also due to RBIs latest directive to limit credit growth of Indian banks by up to 20%. Also, the hike was inevitable due to the latest monetary measures announced by the regulator.

HDFC Bank is also planning similar rate hikes. Executive director Paresh Sukthankar said, The PLR hike is warranted and inevitable since the regulator has also signalled a limit to banks credit growth, apart from unveiling CRR and repo rate measures. Prakash P Mallya, CMD, Vijaya Bank, also conceded that his bank would increase rates. Even smaller banks like Development Credit Bank are planning steep increases in lending rates. DCB managing director Gautam Vir told FE: We are going to hike the PLR by 100 bps. Private sector Yes Bank has decided to hike its PLR by 50 bps with effect from August 1, said Rana Kapoor, MD & CEO.

Other state-run banks like IDBI Bank, Dena Bank and Bank of India are also planning hikes in excess of 50 bps in their lending rates. Pune-based Bank of Maharashtra, which had increased its PLR by 25 bps to 13.50% on July 14, has hinted that it may look at a hike in the range of 25-75 bps. CMD Allen CA Pareira said Bank of Maharashtra, which has already raised its deposit rates by 25-50 bps on July 10, might not raise these rates any further at this time. MS Sundara Rajan, CMD, Indian Bank, said keeping in view RBIs latest move, the bank will have to restructure its business plan for the year as the rules of the game have changed. Under our earlier plan, we had projected a target of 25% growth in credit. But, keeping in view RBIs fresh diktat, we have moderated our credit growth to 20% now, he said.

After the upcoming hike announced by major banks, auto loans would be costlier by 225-250 bps since January. As a result, an auto loan of Rs 3 lakh for a three-year period will become more expensive by Rs 6,000; it will be Rs 10,000 more on a Rs 5-lakh loan and Rs 16,000 more on a loan of Rs 8 lakh. Foreign banks are also planning to hike their lending rates. We will continue to stay close to the market. As our margins will be squeezed following RBIs rate hike, we will take a close look at raising our lending rates across the board any time soon, following the other big private banks, said a top official from Barclays. RBI has given a very clear signal to banks. We will have to raise our borrowing and lending rates. The policy hikes will be reflected in higher bank lending rates in a short span of time, said an ABN Amro bank official. We revised our deposit rates just a couple of weeks ago. After RBIs rate hike, we may look at another hike in lending rates, said an official from HSBC.

Banks across the country had hiked the interest rates by 25-50 bps in May, followed by another 50-75-bp hike in July. Since over 80% of cars in India are financed, there was a significant drop in growth volume in June. According to the Society of Indian Automobile Manufacturers, the passenger car industry grew by a mere 6.10% in June at 99,738 units, compared to 94,002 units in June last year. This is a dip of around 8% compared with the 14.26% growth in May at 1,10,743 units vis--vis 96,923 units in the same month last year.

Markets bounce back

Key Indian equity indices made a strong comeback on Wednesday on the back of positive global cues, a decline in global crude prices and short covering ahead of the July derivatives contract expiry on Thursday. The 30-share Sensex of the BSE gained 495.67 points, or 3.59%, before closing at 14,287.21 points.

The S&P CNX Nifty of the NSE added 123.70 points, or 2.95%, to close at 4,313.55 points. Following RBIs double whammy on Tuesday, the Sensex and Nifty had posted losses of 557.57 points (3.89%) and 142.25 points (3.28%), respectively.

Amitabh Chakraborty, president-equity, Religare Securities, said, Now that oil prices are coming down, we dont see any further monetary measures by the regulator. He added that in the last two weeks, inflation has remained stable and is expected to start coming down. Ahead of the expiry of the derivatives contract for July, investors covered their short positions. However, a good number of short positions were carried forward to the next month, dealers said. The Nifty July contract ended the day at 4,327 points, a premium of 13 points over the spot price.