Loans to cost more as SBI hikes lending rates

Loans to cost more as SBI hikes lending rates
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First Published: Wed, Oct 20 2010. 11 20 PM IST

 Expensive lending: A hike in key policy rates by the Reserve Bank of India has led to an increase in the cost of funds for banks. Photo: Indranil Bhoumik/Mint
Expensive lending: A hike in key policy rates by the Reserve Bank of India has led to an increase in the cost of funds for banks. Photo: Indranil Bhoumik/Mint
Updated: Wed, Oct 20 2010. 11 20 PM IST
The country’s largest lender, State Bank of India (SBI), on Wednesday raised its loan rates, citing an increase in its cost of funds.
Expensive lending: A hike in key policy rates by the Reserve Bank of India has led to an increase in the cost of funds for banks. Photo: Indranil Bhoumik/Mint
The bank hiked its minimum lending rate, or base rate, by 10 basis points (bps) to 7.6% and the benchmark prime lending rate, or BPLR, by 25 bps to 12.5%. One basis point is one-hundredth of a percentage point.
The new rates will be effective from 21 October and will increase the cost of all floating rate loans. Borrowers with fixed-rate loans will not be affected, but few customers have raised loans at fixed rates.
The base rate replaced BPLR from July 1, but those who had raised loans linked to BPLR can continue to service those loans if they choose to do so.
India’s banking industry has a significant chunk of loans linked to BPLR. SBI has around 46% of its total loan portfolio, in terms of value, still under the BPLR system.
Although BPLR is meant for the best-rated customers, about 70% of consumers used to access loans at below BPLR. The base rate, on the other hand, is the floor and no one can raise bank loans at a lower rate than this.
“We decided to increase the base rate in proportion to the increase in our cost of deposits. This increase is still modest in the industry as compared to others,” SBI chief financial officer S.S. Ranjan said.
Early this month, SBI had hiked fixed deposit rates by 25-75 bps across maturities. Its cost of funds rose to 5.7% in the September quarter, up from 5.53% in the previous quarter, Ranjan said.
Most other banks have raised their loan rates before SBI did so.
ICICI Bank Ltd, HDFC Bank Ltd, Punjab National Bank, Bank of Baroda, IDBI Bank Ltd, Axis Bank Ltd, Kotak Mahindra Bank Ltd and Standard Chartered Bank, among others, have raised their base rates by 25-50 bps.
Currently, the base rates of major banks are in the range of 7.50-8.5%.
DBS Bank Ltd hiked its base rate on Wednesday by 25 bps to 7.25%.
According to Ranjan, both lending and deposit rates in the system are set to go up by another 20-40 bps by March.
A hike in key policy rates by banking regulator, the Reserve Bank of India (RBI), has led to an increase in the cost of funds for banks.
So far this year, RBI has hiked its policy rates five times. The last time it raised its policy rate was on 16 September. The rate at which it lends to banks was hiked by 25 bps to 6%.
Along with the hike in policy rates, tight liquidity is also impacting the cost of funds.
Banks have been borrowing in the range of Rs60,000-80,000 crore daily from RBI. On Wednesday, banks borrowed around Rs67,000 crore from the central bank.
“The cost of funds of banks will go up in the coming quarter on account of repricing of deposits. The effect of hike in deposit rates last month will show its impact in the coming quarter. This may push up the base rates of banks further,” Abhishek Kothari, reserach analyst with Mumbai-based Way2Wealth Brokers Pvt. Ltd, said.
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First Published: Wed, Oct 20 2010. 11 20 PM IST
More Topics: SBI | Loans rates | Cost of funds | Base rate | BPLR |