Banks expect lending rates to go up by 1 percentage point news
25 June 2008

Mumbai: Loans across-the-board will become dearer by up to 1.0 percentage point following the Reserve Bank's decision to hike its short-term lending rate and cash reserve ratio for banks.

"Prime lending rate would go up by up to 50 basis points with the hike in CRR and repo rate," K C Chakrabarty, chairman of public sector lender Punjab National Bank, said.

"All the loans linked to the PLR, like consumer loans, home loans and personal loans are bound to go up. At the same time, deposit rates would also be increased," he added.

The quantum of increase in each segment would be decided by asset liability committee of the bank in the next few days, the PNB chairman said.

United Bank of India CMD P K Gupta said that the banks may have to go in for a hike on interest rates ahead of the monetary policy scheduled next month.

The quantum of increase will be decided after assessing the situation and the need of the individual banks, Gupta said.

Keki Mistry, managing director of private sector lender HDFC Bank, said if the cost of funding is raised, the bank would pass it on to the borrowers. HDFC Bank had recently raised its prime-lending rate.

"I expect no further action from RBI immediately," he added.

Indian Banks Association (IBA) chief M B N Rao justified the increase, saying it was expected with inflation at a high level. He, however, said the rise in repo rate, is an indication that if inflation does not come down, the interest rates may go up.

The banks would wait for some time before increasing home loan rates, said Rao, who is also CMD of public sector Canara Bank.

Bank of Baroda CMD M D Mallya said, "We have to evaluate the situation. The final decision on the rate hike will be taken after the ALCO meeting."  he said the CRR hike would result in an outgo of around Rs50 crore for his bank.

IDBI's chairman and managing director, Yogesh Agarwal said the bank would take a call on its lending rates at its ALCO meet "which would meet shortly."

RBI raised its short-term lending rate to banks and their mandatory cash reserve by 50 basis points each with an aim to suck up an estimated Rs15,000-20,000 crore of liquidity.

While the CRR has been raised from 8.25 per cent to 8.75 per cent in two installments beginning July 5, the repo rate has been increased from 8.0 per cent to 8.5 per cent with immediate effect.


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Banks expect lending rates to go up by 1 percentage point