Mumbai: Private sector Yes Bank Ltd and state-owned Punjab National Bank (PNB), Canara Bank and Oriental Bank of Commerce (OBC) hiked lending rates by 50 basis points (bps) each a day after the Reserve Bank of India (RBI) raised its key policy rate by half a percentage point to 7.25% to tame a runaway inflation.

Bank of India, Bank of Baroda, Indian Overseas Bank, Development Credit Bank Ltd (DCB) and Dhanlaxmi Bank Ltd will hike rates by 50 basis points next week, executives said. One basis point is one-hundredth of a percentage point.

Bankers said besides RBI’s policy rate hike, increased provisioning requirements and higher costs on savings account deposits were the reasons for the hike. Larger banks such as ICICI Bank Ltd, HDFC Bank Ltd and State Bank of India (SBI) have also indicated they will hike rates.

RBI has asked banks to set aside more money for bad loans, increasing provisions by up to 10%. Also, interest rates on savings deposits were increased by 50 bps to 4%, the first such raise in 19 years.

PNB chairman K.R. Kamath lowered the lender’s 2011-12 forecast for net interest margin (NIM), a key measure of profitability, because of the hike in savings bank rate. “There will be around a 15 basis points impact on cost of funds due to RBI increasing the rates on saving bank deposits," he said. “We are aiming to maintain a NIM of 3.5% in the current fiscal." PNB’s NIM for 2010-11 was at 3.96%.

Bankers and analysts said the hike in lending rates is likely to affect loan demand.

“It’s very clear that RBI is inclined to tame inflation at the cost of growth and it is likely to impact credit demand," said Bipin Kabra, chief financial officer at Dhanlaxmi Bank, adding that his bank is likely to hike its base lending rate from 9.25% to 9.75% next week.

Bank rates are now at a threshold and any further hike could hurt company revenue, said Ajay Parmar, head of institutional research at Emkay Global Financial Services Ltd.

“It will start to pinch companies" in sectors like auto and housing, Parmar said. “I expect another 50-75 bps of hikes, which is likely to hurt company volumes as interest costs add on."

Murli Natrajan, managing director and chief executive officer at DCB, said the lender will hike its base rate by 25-50 bps “in a week’s time".

Yes Bank increased its base rate by 50 bps to 9.50% effective Wednesday and said the 4% interest on savings account deposits will increase its cost of funds by less than 1 basis point.

ICICI Bank’s managing director Chanda Kochhar said on Tuesday that lending rates could go up by 50-100 bps. SBI chairman Pratip Chaudhuri had said rates could go up by 25-50 bps.

“Interest rates are bound to go up," HDFC Bank managing director Aditya Puri had said at the same post-policy bankers’ meet.