Mumbai: Emboldened by the State Bank of India (SBI) and Bank of Baroda’s decisions last week to hike interest rates, other public sector banks are expected to follow suit beginning this week.
Though they were initially slow to respond to the Reserve Bank’s rate hikes, many have now indicated that they will raise their rates as the cash reserve ratio (CRR) hike could impact their margins negatively.
Private sector banks, had, however, been quick to respond to RBI’s move with many jacking up their rates within three -four days of the banking regulator’s move.
While Yes Bank upped its prime lending rate (PLR) on 30 March itself, and ICICI Bank, HDFC Bank, HDFC Ltd and UTI Bank also raised their rates early last week.
Bank of Baroda became the first public sector bank to hike its PLR this time and was soon followed by SBI, which effected a 0.50% hike in its PLR on Saturday.
While Punjab National Bank has already decided to hike its PLR, others such as Union Bank of India (UBI) and Indian Overseas Bank (IOB) are expected to do so early this week.
Chennai-based IOB is expected to effect a 0.75% increase and UBI is believed to be mulling a 0.50% to 0.75% raise.
Others in the public sector space, including big names such as Bank of India, Oriental Bank of Commerce, Dena Bank, Canara Bank, Syndicate Bank and Corporation Bank are expected to take a call on their rates beginning this week.
An interesting point to note will be whether the public sector lenders will restrict the hikes to only their PLRs or will extend them to home, educational and other loans as well.
These banks had refrained from hiking rates on home and educational loans below a certain limit following a directive from the Union Finance Minister P. Chidambaram the last time RBI upped the CRR threshold in January.
But now, with their cost of funds zooming and their margins in danger of being negatively impacted, banks could be tempted to jack up their rates on retail loans as well.
However, exposure of many public sector banks, including big names such as State Bank and Bank of India, towards the housing sector is not as high as that of private players like ICICI Bank and hence there is a feeling that this cost could be absorbed by the public sector banks, at least in the short-term.
As a rate hike in retail loans impacts small borrowers maximum, there is likely to be pressure from political parties to rein in such hikes.
With the ruling UPA suffering defeats in Punjab and Uttaranchal and most recently on Saturday in the Delhi municipal polls, any move to raise costs for small borrowers is not expected to find favour with political parties.
Another point likely to influence any decision could be the impending annual monetary policy for FY 08 to be announced by the apex bank on 24 April.
With a hardening interest rate regime, public sector banks will also have to factor in a possible rise then. Whether they will wait till the month-end before taking a decision on home and educational loans remains to be seen.
A hike in their prime lending rates, however, appears a certainty.