HDFC Bank Ltd, India’s third-biggest by market value, increased its lending rate for a second time since December to pass on rising borrowing costs, Ashish Parthasarthy, the head of trading at the bank said.
HDFC Bank raised its benchmark rate by 100 basis points to 14%, effective immediately in response to an increase in rates by the Reserve Bank of India on 31 January.
“We raised it because of rising deposit costs, an increase in provisions and the continuing tight monetary stance,” said Parthasarthy, referring to the benchmark rate.
“There was a very clear indication by the RBI that liquidity management will be prime and that banks should not reply on RBI support for managing their books. So the pressure on deposits will continue,” he said.
HDFC Bank follows its bigger rival ICICI Bank, which raised its benchmark lending rate by 100 basis points to 14.75% on 6 February.
RBI raised its overnight lending rate to a four-year high to contain accelerating inflation in the world’s fastest growing major economy after China.
The central bank in its 31 January quarterly monetary policy had increased the rate it lends overnight by a quarter point to 7.5% to curb inflation, which rose to 6.58% last month, the highest in more than two years.
The central bank has raised rates five times over the past year to contain inflation. On 31 January, it also told banks to double provisions on lending for real-estate purchases, credit cards, and personal loans and investments, to cool asset prices and curb defaults.
“Rising lending rates will now begin to have an impact on loan growth,” said R.K. Gupta who manages $68 million of assets at Credit Capital Asset Management in New Delhi. “The budget on 28 February will probably announce measures to make bank deposits attractive.”
HDFC Bank on 21 December raised the rate it charges its best customers by 1.5 percentage points to 13% and half a percentage point more for its deposits. ICICI Bank raised its loan rate by 0.5 percentage point on 18 December to 13.75%.
Demand for bank loans in India rose 30% in the year ended 26 January, as per data posted on the central bank website. Individuals and companies in the $854 billion economy are borrowing more to spend on houses, cars and durables and to expand facilities in an economy poised to expand for a second year more than 9% in the year ending 31 March.
“Borrowing costs would probably have gone up at least by 100 basis points in the past one month,” said Parthasarthy. “Over the past year we have raised deposit rate more than four times.” Banks have to pay as much as 10% on one-year funds from large depositors, compared with less than 8% six to nine months earlier, he said.
State Bank of India, the nation’s biggest, last week sold $700 million of bonds to overseas investors as the bank with 100 million customers sought more funds to bolster capital.
Shares of HDFC Bank, which gained 35% in the past six months, closed at Rs1,092.75, falling Rs17.1 or 1.5% on the Bombay Stock Exchange.