Mumbai: The latest round of rate hikes by Indian banks has taken loan rates closer to their pre-credit crisis peak in 2008 and rates could even go up further, making money costliest in a decade for corporations as well as individuals.
Bank analysts say that lending rates have room to go up by 25-75 basis points (bps) in 2011.
One basis point is one-hundredth of a percentage point.
Also See | The jouney so far (Graphic)
Many banks, including the country’s largest lender State Bank of India (SBI) and second largest ICICI Bank Ltd, hiked their lending rates this month.
With the latest round of rate hikes, the gap between the policy rate of the central bank and the lending rate of banks is at the highest ever.
The pre-crisis level policy rate of the Reserve Bank of India (RBI) was at 9%, which made the gap between the policy rate and the prime lending rate (PLR) of public sector banks 4.25 percentage points. Now RBI’s policy rate is at 6.25%, and the gap has widened to 6.5 percentage points.
For technical reasons, Indian banks have two loan rates. PLR, theoretically meant for the best customers of the bank, is still in vogue even as the base rate, or the minimum lending rate, came into effect in July. All fresh loans are linked to the base rate whereas the old customers are serviced through PLRs. Any change in PLRs affects the old customers of the banks. According to a rough estimate by the analysts, around 70-75% of the loans in the banking system are still linked to the PLR system.
SBI hiked its base rate by 40 bps to 8% last week and PLR by 25 bps to 12.75%. The bank’s pre-crisis level PLR was 13.25%—a level that analysts expect will soon be reached.
With the recent hike, ICICI Bank’s PLR stood 0.25% higher at 17%, just 25 bps lower than its 2008 rate. The bank raised its base rate by 0.50% to 8.25%.
Many banks have raised their loan rates twice in the past one month. The lending rate hikes are accompanied by deposit rate hikes.
Ankit Ladhani, research analyst at Sharekhan Ltd, said banks have been forced to hike lending rates to maintain their margins because scarce money in the banking system has forced them to pay more to garner deposits.
“Banks are looking to keep their net interest margins at 2.5% at the minimum and since some of them are offering deposit rates at 9%, the lending has to be at at least 11.5% to maintain margins,” he said.
“The PLR of private sector banks has generally remained 100-125 bps above the PLR of the public sector banks during the period March 2004 to June 2007, before expanding to 200 bps during June 2007 to June 2008,” said P. Soujanya, group head of public sector banks at Care Ratings Ltd.
“Post September 2008, the gap has increased by 300-400 bps. However, much of the lending during this period was below PLR,” she said.
Lending rates are likely to go up further as expectations are that RBI will hike its policy rate by at least 25 bp in its monetary policy review later this month.
Kajal Gandhi, assistant vice- president at ICICI Securities Ltd, said the hike could increase pressure on credit growth and year-on-year growth may fall further as lending may not keep pace with the year-ago quarter.
“The last quarter of 2009-10 saw a robust 22% growth and this time it’s going to be much lower. Demand for credit from small- and mid-cap companies has not been there this year as companies have put their plans on hold because of global uncertainties. And now with rates at historic highs, they cannot take loans because it will hit their bottomline,” she said.
According to the latest RBI data, credit in the banking system is growing at 23.7%, but deposits are growing at 14.7%. Hence, banks are unable to fund this credit growth through the deposits they are garnering. To attract more deposits, they are forced to hike their deposit rates, which again pushes up the cost of funds.
According to Rupa Rege Nitsure, chief economist of Bank of Baroda, banks’ dependence on wholesale deposits, or high-cost deposits from firms, has risen. She estimates that around 25-30% of the banking system’s time deposit base is constituted by wholesale deposits.
Banks’ dependence on such deposits and the increase in short-term certificate of deposits—their proportion in bank balance sheet has increased from 3% to around 9%—have ensured that any deposit rate hike is instantaneous.
According to Nitsure, banks’ reluctance to increase deposit rates even when inflation was ruling at double digits forced retail depositors to shun the banking channel.
“It was definitely a serious mistake in resource management by banks that they did not hike the deposit rates. Now it is late and banks have to depend on wholesale deposits for some more time as retail investors will take time to put their money in the banking system, expecting more deposit rate hikes in the future,” Nitsure said.
To attract depositors, SBI has increased its deposit rates by 50-100 bps. A 555-day deposit with the bank now attracts 9% interest against 8.5% earlier. Also, for deposits between 7 days and 14 days, and 15 days and 45 days, the bank is offering interest rates of 4% and 5%.
According to analysts, this will in time result into customers withdrawing their money from savings deposits, which give an interest rate of 3.5%.
“It will be interesting to see how savings account customers behave. If they start withdrawing money from the savings account for these schemes, it will affect many banks’ profit margins,” said an analyst with a domestic brokerage firm.
A research note of Edelweiss Securities Ltd said smaller public sector banks will be more affected than larger public sector banks and private banks.
Graphic: Naveen Kumar Saini/Mint