Banks hold back from hiking long-term lending rates

Mumbai, Jan 31 | Updated: Feb 1 2006, 05:30am hrs
Even as the short-term lending rates and deposits across maturities are increasing, banks have refrained from hiking their long-term lending rates for now.

Bank of Baroda (BoB), for instance, after deliberating on the issue of interest rates, has decided not to touch lending rates for now which means it is not revising the prime lending rate (PLR).

However, there has been a re-alignment of sub-PLR rates, as also short-term lending rates that were earlier linked to Mibor, a senior official of the bank told FE. BoB has also increased their deposit rates (second one in short span of time) by 25 basis points, with effect from February 1, 2006.

Dena Bank, too, has announced that it is raising its deposit rates by 25-30 basis points across all maturity buckets. The banks chairman and managing director, MV Nair said, The interest rate fine tuning is in line with our asset-liability management exercise.

Our deposits have not been able to keep pace with our credit growth, and hence we have decided to focus on enhancing deposit mobilisation. We have no plans to increase the lending rates, he clarified. The bank had effected the previous rate hike in November.

Changing Equations

Banks have decided not to revise the PLR
But there has been a re-alignment of sub-PLR rates
Dena Bank raising its deposit rates by 25-30 bps

Union Bank of Indias CMD, Cherian Varghese also concurred with Mr Nair. The banking industry is witnessing an incremental CD ratio of over 100%, which is difficult to sustain, unless deposits also grow. So certainly, deposit rates would have to be increased to enable banks to garner more funds, he said.

He said that as the average SLR holding of banks was at 35%, well above the mandated 25% level, banks would not be hard-pressed to hike long-term lending rates.

The short-term lending rates have already gone up following a firming of call rates, etc, he pointed out. Regarding retail lending rates, Mr Varghese pointed out that with a large amount of liquidity slated to come into the banking system, there was no immediate cause for retail lending rates to rise.