Rate hikes deal blow to growth

Aug 23 2013, 08:54 IST
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SummaryHome, auto loans to become more expensive as ICICI, HDFC raise base rate, retail PLR by 25 bps.

Companies and individuals will pay more for loans with ICICI Bank hiking its base lending rate by 25 basis points (bps) to 10% on Thursday. Home loans from HDFC will also become expensive as the housing major increased its retail prime lending rate by 25 bps to 16.65%. The hikes signalled that money has become dearer and that banks believe it could stay that way for a while.

State Bank of India (SBI) chairman Pratip Chaudhuri said his bank would not charge borrowers more. We are not going to hike interest rates either for India Inc or for our retail customers. We would rather bite the bullet, Chaudhuri told FE. The countrys largest lender whose base rate of 9.7% is the lowest in the sector

has maintained that it doesnt see a case for raising rates given it has access to ample low-cost deposits.

Earlier this week, Axis Bank hiked its base rate by 25 bps to 10.25% following HDFC Bank, which upped it by 20 points to 9.8%. Shikha Sharma, CEO and MD, Axis Bank said: The cost of money has gone up and so we have to pass that on to customers. Right now, visibility is poor; so, well have to wait and see how the market behaves and adjust rates accordingly.

An increase in the base rate means all customers, whether companies or individuals, pay more for their loans, assuming banks charge the same spread and that the loans were not contracted at a fixed rate.

A 25 bps rise in the base rate translates into an increase of Rs 320 in the equated monthly instalment on a loan of Rs 20 lakh with a tenure of 20 years. The increase in base rates is not surprising since, over the past few months, banks have been paying more to source funds given how the growth in deposits especially cheaper Casa has been sluggish; ICICI Bank, for instance, had raised deposit rates by up to 75 bps across select maturities late last week. Deposits grew at an anaemic 13% year-on-year in the fortnight to August 9.

More important, with the Reserve Bank of India (RBI) opting to tighten liquidity to fight a falling rupee it fired the first salvo on July 15 hiking the interest rate on the marginal standing facility to 10.25%

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