Mumbai: Repaying EMIs has just got a tougher with banks responding to the RBI's tightening of the repo rate or the rate at which they lend to banks (See:RBI hikes repo rate by 50 bps, CRR by 25 bps) with top lenders HDFC and banks like ICICI, Central Bank of India, IDBI Bank, IndusInd Bank, Yes Bank, and Bank of Rajasthan having announced an increase in their interst rates.

Home owners who had availed of loans from banks or financial institutions, with chief home loan company HDFC leading the pack, have hiked their interest rates on home loans.

HDFC and private sector banking heavyweight ICICI Bank have raised their housing finance rates by 75 basis points or 0.75 per cent. The move is set to directly impact home loan borrowers who had opted for the floating rate when availing their loans, and will also pinch new customers opting for fixed rates.

In October 2003 home loan were at their lowest of 7.5 - 7.75 per cent, and have been on a steady march upwards over the past five years.

ICICI Bank's floating rate for consumer loans, which includes home loans as a segment, will now be 14.25 per cent per annum, up from the erstwhile 13.50 per cent. Home loan borrowers who had signed up for the fixed rate plan could well pat themselves on the back, as the effect of the interest rate revision bypasses them. New borrowers opting for the fixed rate option would have to sign up for a rate of 15.5 per cent per annum.

ICICI's benchmark advance rate for corporate borrowers now goes up to 17.25 per cent from the earlier 16.50 per cent, and is amongst the most expensive rates amongst major lenders in the market.

HDFC's revised retail PLR, which is the benchmark for floating rate loans, will be up 75 basis points, though fixed-rate borrowers, both existing and new, would be at the existing 14 per cent.

The new rates are effective from today.

The interest rate revision is also likely to impact personal and corporate loans. The hike follows a 50 basis point increase in the repo rate announced by the Reserve Bank of India two days ago. The announcement was also accompanied by a 25 basis point hike in the cash reserve ratio (CRR), which is the proportion of reserves banks necessarily need to maintain as cash reserves with the RBI.

The higher rates do herald some smiles for fixed deposit customers of ICICI Bank, which has announced a 75 to 100 basis point (0.75 to 1 per cent) increase in its fixed deposit rates.

Other nationalised and private sector banks such as Central Bank of India, IDBI Bank, IndusInd Bank, and Bank of Rajasthan have chosen to increase only their benchmark prime lending rate (PLRs), which is the rate charged by the bank to its ''prime'' borrowers, generally corporations.

Central Bank has raised its prime lending rate (PLR) by 75 basis points to 13.75 per cent, though it has left its deposit rates unchanged for now. IDBI Bank's PLR will increase 50 basis points to 14.25 per cent. Yes Bank hiked its lending rates by 50 basis points to 17 per cent, while additionally deciding to increase fixed deposit rates for deposits between 1 year and a day up to 18 months by 25 basis points to 10 per cent.

Bank of Rajasthan has chosen to increase its PLR by 100 basis points to 16 per cent.

State Bank of India, India's largest bank is yet to announce a rate hike. Other banks are likely to follow HDFC and ICICI in their rate revision in the coming days.

The last time home loan rates were at these levels was back in 1999-2000, before the retail and real estate boom started in the country. However, though the rates are at the same levels as the 1990s, the average cost of borrowing is lower on account of tax breaks that allow deductions of up to Rs1.5 lakh on interest payments on home loans from the annual income tax liability. Also, increased incomes since the 1990s have also enhanced affordability.

Lenders are now worried about a drop in their growth rates. Inflationary pressures have already delivered a hit on consumer spending, and a number of buyers are now reported to be deferring their purchase decision till the real estate market is on a more stable footing, and inflation decreases somewhat.

The RBI said inflation has emerged as the biggest risk to global outlook and bringing down inflation is the highest priority. RBI aims to bring down inflation to 5 per cent as soon as possible and endeavours to lower it to 7 per cent by March 2009.

The current hike in interest rates effectively makes a typical borrower with a 15-year loan pay around Rs48 more each month for every Rs1,00,000 that he borrows. The equated monthly instalment (EMI) for a Rs1 lakh borrowing would not work out to Rs1,185 for a floating rate loan, and Rs1,332 for a fixed rate loan.

Moreover, the 2.25 per cent difference between the floating rate and fixed rate loans would tend to skew borrowing towards floating rates. That, at a time when the RBI has said that the increase in home loan rates may not be the end of the line for rate hikes.

On 29 July, in its first quarterly review of the monetary policy for 2008, the Reserve Bank of India had raised its key lending rate, the repo rate, by 50 basis points to 9.0 per cent, its third hike in two months, and the CRR by 25 bps to 9 per cent in a bid to mop up excess liquidity from the banking system. The CRR is the funds banks must keep on deposit with RBI. Thus far this year, interest rates have been revised upwards three times, with analysts expecting more hikes in the future.