Mumbai: Companies and individual consumers will have to pay more for bank loans from Friday, a fortnight after the Indian central bank raised its policy rates.
At least five banks—Punjab National Bank (PNB), IDBI Bank Ltd, Axis Bank Ltd, Kotak Mahindra Bank Ltd and Standard Chartered Bank—had raised their minimum lending rate, or base rate, on Thursday at the time of writing this report even as State Bank of India, the nation’s largest lender, has left it unchanged.
The new rates will take effect from 1 October. Banks are also raising their deposit rates. PNB and IDBI Bank raised their base rate by 50 basis points (bps) each while Kotak Mahindra, Axis Bank and Standard Chartered raised their rate by 25 bps. One bp is one hundredth of a percentage point. More banks are set to raise their loan rates.
The Reserve Bank of India on 16 September raised the rate at which it lends to banks by 0.25% to 6% and the rate at which it borrows from them by 0.50% to 5% to tame inflation.
This is the first instance of a hike in the base rate since it was introduced in July to replace the benchmark prime lending rate, or BPLR, the rate at which banks are expected to price loans to their best customers. About 80% of bank customers were raising loans at below BPLR.
Many of the old borrowers of banks are continuing with the BPLR regime and hence banks are maintaining a dual rate system for now. All new loans taken after July are linked to the base rate.
Most banks raised their BPLR by 50 bps but left their base rate unchanged. This is because the base rate can be revised once in every quarter while no such stipulation is attached to the BPLR.
Besides, the base rate also depends on a bank’s average cost of funds. In other words, a hike in policy rate does not automatically lead to a base rate hike as banks’ cost of funds does not go up unless they raise their deposit rates. Banks started to raise their deposit rates in August.
Following the rate revision, the base rate for PNB and IDBI stood at 8.5%, while that of Axis Bank was at 7.75% and Kotak Mahindra and Standard Chartered at 7.5%.
SBI and PNB raised deposit rates by 0.50-0.75%. IDBI raised its deposit rates by 0.15-0.50%. The maximum interest rate payable by PNB will be 8% for deposits maturing between eight and 10 years. SBI will offer 7.75% on deposits of similar maturity.