With credit growth sluggish, banks are busy increasing lending rates these days. The reason is simple ? the cost of borrowing has gone up and the money market continues to remain tight.
On Tuesday, Kotak Mahindra Bank hiked its base rate by 25 basis points to 7.75% for the second time since July 2010 when the new base rate regime was introduced. State-owned Corporation Bank had raised its base rate by 50 basis points to 8.25% immediately after RBI?s latest hike in key policy rates.
Said KVS Manian, group head, consumer banking, Kotak Mahindra Bank, ?The increase in lending rates is reflective of the higher cost of borrowing. Recently, we have hiked our deposit rates to the tune of 25 basis points across some maturities. This has resulted in higher cost of funds.? Manian said the loan book was unlikely to be impacted by the rate hike. ?The home loan segment, which is linked to the base rate could see some impact but there is enough demand in the market.?
MV Nair, CMD, Union Bank, said credit growth hasn?t been as robust as expected. According to HSU Kamath, ED, Canara Bank, ?The growth in credit could have been better as there is some pickup in some sectors and individuals too are borrowing. That?s why Canara Bank wants to wait before it increases rates. Other banks are hesitating to increase rates.?
Kamath further said, ?The cost of deposits is going up and the one-year CD rate is not less than 8.5%. Also, liquidity remains tight. However, we will hike rates only if there is a pickup in credit. It may be due to the fact that though deposits have grown by 15% or so in the past fortnight, it may not be enough.?
Private sector lender Lakshmi Vilas Bank on Tuesday increased domestic term deposits rates by 25-75 basis points for maturities of one year to less than two years.