SBI, ICICI hike loan rates to 15-year highs

TNN | Aug 12, 2011, 12.45AM IST;  MUMBAI: The misery keeps piling up for borrowers. Bank lending rates have moved close to a 15-year high, with the country's largest lender, State Bank of India, and ICICI Bank increasing their benchmark rates by 50 basis points. The rate hikes are in response to the increase in policy rates by the Reserve Bank of India on July 26. 

SBI said it would increase the interest on fixed deposits of 6-9 months by 5bps to 7% and maintained rates on all other maturities. SBI's benchmark prime lending rate (PLR) now stands at 14.75%. The last time it was at this level was in October 1996. The base rate, which applies to borrowers who have availed loans after July 2010, has also been increased by 50 basis points to 10%.

In case of ICICI Bank, the floating reference rate, which is the benchmark for retail loans and the I-bar-the benchmark for corporate loans-have both been increased by 50 basis points to 15.75% and 18.75%, respectively. The country's largest housing finance company, HDFC, had already raised rates by 50 basis points last week.

While hitting individuals, the higher rates are also likely to impact the auto and real estate sectors, where demand is directly linked to the cost of funds for individuals. A 50 basis points hike will increase the equated monthly installment on a 20-year home loan of Rs 10 lakh by around Rs 342.

With inflation inching close to double digits, there are chances that the RBI may increase rates again in future. However, some bond dealers feel that given the decision by the US Fed to keep rates near zero and the likelihood of a sustained slowdown in West, the RBI may choose to pause. This view is reflected in the prices of government bonds. Banks which are lending at 8% in the interbank market are willing to invest in 10-year bonds at a yield of 8.2%. A uniform yield across a long tenure indicates that lenders anticipate a slowdown. At the same time, banks are also not increasing long-term deposit rates with the same measure as short-term rates as they are uncertain of the demand for loans.

The rate increases come at a time when industry bodies have been pleading with the central bank to cut interest rates in the wake of the US downgrade. "The trend of declining commodity prices since the rating downgrade also augurs well for a RBI rate cut. The Reuters-Jefferies CRB commodities index is now at an eight-month low on global growth fears, the perfect foil for a RBI rate cut as fuel alone accounts for over 15% of the WPI and the government is already talking of a cut in petrol prices if crude prices decline further," said the Federation of Indian Chambers of Commerce and Industry in a statement.