Mumbai: The interest rate cycle is changing in India even though the banking regulator has not raised its key policy rate yet.
Private sector lenders ICICI Bank Ltd and Kotak Mahindra Bank Ltd as well as the largest mortgage player, Housing Development Finance Corp. Ltd (HDFC), withdrew special home loan schemes on Thursday.
Other commercial banks such as Axis Bank Ltd, Union Bank of India, Canara Bank, Punjab National Bank, Bank of India and IDBI Bank Ltd discontinued special home loan schemes after the Reserve Bank of India (RBI) announced a two-phase 75 basis points hike in the cash reserve ratio (CRR) in its January review of monetary policy.
One basis point is one-hundredth of a percentage point. CRR is the portion of deposits that banks are required to maintain with RBI.
HDFC Bank Ltd, IDBI Bank and Kotak Mahindra Bank have also raised interest rates on auto loans.
“The hike in rates comes after most of the banks raised their deposit rates by 75 to 100 basis points. We have just realigned the lending rates to deposit rates,” said Kamlesh Rao, executive vice-president at Kotak Mahindra Bank.
IDBI Bank was the first to increase deposit rates by 50 basis points. ICICI Bank and HDFC Bank also hiked interest rates on their deposit products.
The pressure on banks to raise lending rates will increase from April when the cost of savings bank money becomes more expensive. Banks offer 3.5% interest on savings accounts, but the actual cost is less as they offer interest on the minimum balance kept between the 10th and the last day of a month. From April, however, interest will need to be computed daily.
Another game changer is the abolition of the concept of benchmark prime lending rate (BPLR) and introduction of the base rate below which no bank will be allowed to offer loans. Till now, banks have been keeping a high BPLR and giving loans to 70% of their customers at below BPLR.
Rising bond yields are a reflection of the changing rate cycle. The yield on the 10-year bond was 7.94% on Thursday, against 7.83% before the presentation of Budget on 26 February.
HDFC said it has decided to discontinue its special home loan scheme. Still, those who have applied for loans till 27 February and avail of at least part of the disbursement till 31 March will get loans at 8.25% for two years.
The country’s largest private sector lender ICICI Bank withdrew its 8.25% special home loan scheme and hiked auto loan rates.
“Auto loan rates have been raised by 0.25-0.5% depending on segment and tenure with effect from 5 March,” an ICICI Bank spokesman said. With this hike, lending rates for new auto loans will be in the range of 9.75-11%.
Public sector banks such as Union Bank of India, Canara Bank, Punjab National Bank and Bank of India will now disburse loans at the rates prevailing in September when the special schemes were introduced.
Many bankers said the rates may rise further after RBI unveils its monetary policy at the end of April when it’s expected to raise its policy rate to fight rising inflation.
Anup Roy contributed to this story.