PNB fires first shot, raises lending rates by 75 bps

Written by fe Bureau | Mumbai | Updated: Jul 31 2010, 06:24am hrs
In a move that indicates money could become much more costly soon, Punjab National Bank (PNB) on Friday increased lending rates, raising its benchmark prime lending rate (BPLR) by a steep 75 basis points to 11.75%. However, the the countrys second-largest lender left its base rate unchanged at 8%. We have just announced the base rate; so, we will revise it only after three months, KR Kamath, CMD, PNB said, adding the BPLR would be applicable to the banks existing customers, who have not opted to shift to the base rate. Existing borrowers now have the option of shifting to the base rate to avoid the increase in interest rates, Kamath explained. PNB also hiked deposit rates by up to 75 basis points across maturities.

While others have raised deposit rates following Tuesdays increase in key rates, PNB is the first to hike loan rates. Lenders, including HDFC Bank and SBI, had indicated that they would be raising loan rates shortly. Paresh Sukthankar, ED, HDFC Bank had observed that the increase in deposit rates would not impact its margins since the cost would be passed on to borrowers. Sukthankar had said the bank would review its base and lending rates soon, saying he expected lending rates would reflect the higher cost of deposits.

Following the hike in RBIs repo and reverse repo rates, OP Bhatt, chairman, State Bank of India had observed that he believed that deposit rates would rise first, followed by a hike in lending rates later on. Going forward, as credit growth picks up, I see further tightening of liquidity into the system, Bhatt had remarked.

Among banks which have already hiked deposit rates are HDFC Bank, Central Bank of India, Bank of Baroda, Allahabad Bank, South Indian bank, Laxmi Vilas Bank and Kotak Mahindra Bank.

RBI governor D Subbarao had observed at a press meet after reviewing monetary policy for the first quarter: As credit demand picks up and liquidity becomes tighter, we expect both deposit and lending rates to go up. Subbarao was also unambiguous about the fact that rates needed to normalised further since they were not consistent with the current macro environment. We have work to do; we havent reached there yet, he said.