22 banks hike lending rates; only five will give more on deposits

22 banks hike lending rates; only five will give more on deposits

First the bad news: if you have a floating rate loan, your interest burden just went up. Following the Reserve Bank of India’s (RBI) monetary tightening last week, at least 22 banks have increased their base rate and the benchmark prime lending rates (BPLR) by 50 basis points (bps) each, except two banks. ICICI Bank Ltd and South Indian Bank Ltd have increased BPLR by 25 bps.

Base rate is the minimum rate at which banks can lend, while BPLR is the earlier benchmark system that was replaced by base rate but still exists for some old customers. One basis point is one-hundredth of a percentage point.

Also see | Rate Race (PDF)

But there is some good news too: five banks have increased deposit rates by 25-50 bps over various investment tenors. The five banks are Central Bank of India, IDBI Bank Ltd, Union Bank of India, Kotak Mahindra Bank Ltd and Syndicate Bank.

Rationale for the hike

The cost of funds has gone up for the banks, thanks to increase in the repo and reverse repo rates, besides the bank savings rate.

In its bid to contain inflation, RBI on 3 May increased repo rate, at which it lends to commercial banks, and reverse repo rate, at which it accepts deposits from banks, by 50 basis points each. Repo rate now stands at 7.25% and reserve repo at 6.25%. The savings account rate has notched up to 4% from the earlier 3.5% after eight years in the wake of debate on deregularizing the rate.

To preserve their profit margins, they are passing the extra cost incurred on them to the customers.

Have deposit rates peaked

Since out of the 22 banks that have increased lending, only six have increased deposit rates indicates that rates have almost peaked and there is little scope for further revision. “In our view, deposit rates have peaked. Unless inflation shoots up sharply or liquidity tightens, there is little scope of the revision," says Nagesh Pydah, chairman and managing director, Oriental Bank of Commerce.

Salil Datar, head, branch banking and NRI business, Dhanlaxmi Bank Ltd, says, “Fixed deposit (FD) rates will see an upward movement but not as much as base rates. FD rates may come to a level where banks cannot afford to go beyond."

The outlook

How interest rates will move in the future will depend on inflation. “RBI will increase rates only if inflation inches up further," says Pydah. If the latest measures by the apex bank manage to contain inflation, interest rates will not harden much.

Graphic by Sandeep Bhatnagar/Mint

Bindisha Sarang contributed to this story.