Interest rates on short-term bank loans are poised to go up, with the rate of inflation having risen to 7.51 per cent, though banks are unlikely to raise their benchmark prime lending rate. This is around 10.5 per cent for most public sector banks.
"We have have been giving short-term loans -- ranging from one month to three months -- for as low as 4.75 per cent to 5.25 per cent. These loans are practically delinked from the BPLR. We will have to jack up these rates as the yield on government securities is going up," the chairman of a large public sector bank said.
"There is no case for raising our deposit or benchmark lending rates as there is plenty of liquidity in the system. However, we may reprice loans, where the lenders reserved the right to raise rates in the contract note when the loans were sanctioned," said the chairman of another state-owned bank.
This can be done without changing the BPLR. For instance, a loan which was priced at 3 percentage points below BPLR now can be repriced at 2 percentage points below PLR.
This will be done to hedge the drop in banks' income from investments, which is being squeezed on account of the rising yield on government securities.
About 80 per cent of bank loans today are disbursed at below BPLR. Export credit in rupees is disbursed at around 6.5 per cent, while all retail loans except for personal loans are given at around 7.5 per cent to 9 per cent.
Besides, agriculture loans and credit to large companies, too, are disbursed below the BPLR. Only loans to small and medium enterprises and personal loans are priced above the BPLR.
Banks are unlikely to raise their BPLR unless the Reserve Bank of India raises its benchmark bank rate, which is currently at a three-decade low of 6 per cent.
The average loan rate for most banks works to 8-9 per cent and the net interest margin -- that is, the earning on loans minus the cost of funds -- is above 3 per cent.
The net interest margin has been on the rise over the last few years as the banks have cut their deposit rates sharper than the drop in lending rates.
Bankers do not see any immediate trigger for raising the BPLR and deposit rates as the liquidity surplus in the system continues to remain strong at Rs 55,815 crore (Rs 558.15 billion).