Loans getting more expensive

Commercial banks began jacking up their lending rates on Wednesday, a day after the Reserve Bank of India raised the reverse repo rate by 25 basis points, even as the foreign exchange and money markets remained unmoved.

In fact, there was a relief rally in the bond market, while the rupee closed unchanged at Tuesday's level of 45.07 to a dollar.

Banks are increasing their lending rates without changing their benchmark prime lending rates which would have gone up had there been a bank rate hike by the RBI. Essentially, they are shrinking the spread below the BPLR.

For instance, a company, which has been paying 4 per cent below the BPLR, will now have to pay 3.5 per cent. Since most banks' BPLR is pegged at 11 per cent, the actual loan rate is going up from 7 per cent to 7.5 per cent.

State Bank of India Chairman A K Purwar said loan rates would go up for corporates. Union Bank of India Chairman Cherian Verghese said, "There will be up to a 50 basis-point increase in interest rates on short-term loans for corporates. The old loans will be repriced on reset dates and new loan proposals are already attracting higher rates."

Union Bank and Bank of India had started revising the rates on corporate loans even before the RBI announced an increase in the reverse repo rate. "We are asking corporate clients to pay about a 50 basis-point higher interest rate on medium-term loans as the cost of deposits has gone up," said M Balachandarn, chairman, Bank of India.

ICICI Bank's Executive Director Chanda Kochar said, "There is pressure for hardening of interest rates. But we have decided to wait and watch and review the situation. The pressure for increasing interest rates is across loan portfolios and not specific to portfolios like auto or housing loans."

Most banks are taking a close look at their asset-liability portfolios before taking a firm decision on rate hikes.

Bankers said small and mid-sized companies would bear the brunt of the increase in interest rates as banks currently "do not have the pricing power when it comes to large corporates."

To park their surplus funds, banks need to give loans to larger corporates, which have access to alternative sources of funds at very competitive rates. Any attempt by banks to increase interest on advances to large corporates can lead to repayment of loans.

A private sector banker said banks would find it easier to pass on to small and medium corporates the pressure of increasing the net interest income.

Indian Overseas Bank's Executive Director AR Nagappan said there would be a rise in the lending rates for corporates for short-tenure loans. Deposit rates are not likely to increase, at least till the end of the financial year as there is sufficient liquidity and banks have enough resources to support their credit growth.