India's largest lender, State Bank of India (SBI), raised its base lending rate by 20 basis points (bps) to 10% on Wednesday, pushing up EMIs across the board, including on home loans. The state-owned lender also raised its benchmark prime lending rate by 20 bps to 14.75%. The bank stated the increase in rates would be applicable from Thursday.
"If you see, since September 20 the repo rate has gone up by 50 bps and so we thought it necessary to raise these rates. But having raised them, we tried to raise it to the minimum extent possible. Even after raising, we continue to remain one of the cheapest in the market," Arundhati Bhattacharya, chairperson, SBI, told FE.
SBI has become the second bank to have raised its base rate after the Reserve Bank of India (RBI) announced its quarterly monetary policy on October 29, where it raised the repo rate by 25 bps to 7.75%, while cutting the marginal standing facility (MSF) by the same quantum to 8.75%.
Private sector lender HDFC Bank too raised its base rate by 20 bps to 10% on Tuesday.
Analysts see the rate action by SBI as a way to protect net interest margins (NIM) in the bank's domestic business. Domestic margins for the bank have registered a constant downward trend in every quarter since March 2012. From a 4.17% NIM reported as on March 31, 2012, it dropped to 3.44% in the quarter ended June 30, 2013.
"This action is not to align with the market. This has got to do with the increase in repo rate and the impact on margins. SBI has always been cautious of its NIM position and deposit rates are still quite firm. The only rates they could tinker with are the lending rates," said Rajiv Mehta, an analyst with IIFL.
When asked whether the hike in base rate will affect SBI's credit growth, Bhattacharya said the recent spike in credit growth witnessed by the banking system was due to high interest rates in the short-term money market. As commercial paper (CP) rates soared during August and the first half of September, corporates found it unaffordable to raise funds and thus shifted to the cheaper bank loan market, resulting in an impressive credit of 17%-18% for the banking system.
"As CP rates are correcting, the CP portion of the demand has moved back. But you must remember the busy season is