Banks end cut-rate car, home loans spree

Although the Reserve Bank of India is yet to officially raise its policy rates, at least three private banks - HDFC Bank, ICICI Bank and Kotak Mahindra - have raised rates on home and auto loans, reflecting the stiffening money market as well as RBI's recent move to raise the capital reserve ratio by 75 basis points.

Other commercial banks like Axis Bank, Union Bank of India, Canara Bank, Punjab National Bank, Bank of India and IDBI Bank have already discontinued their 'teaser' rates which made headlines a few months back.

The three banks have raised their lending rates by around 100 basis points, following stiffening of the market as the RBI has started withdrawing the liquidity surplus.

"Auto loan rates have been marginally increased by 50 bps," said Pralay Mondal, country head (retail assets & credit cards), HDFC Bank. "The increase in the cost of funds is being passed on to customers. It has been done to protect our margins."

"Auto loan rates have been raised by 0.25-0.5 per cent depending on segment and tenure with effect from 5 March," an ICICI Bank spokesman said.

Banks are raising lending rates to maintain their profitability after they increased deposit rates in the last few months to attract funds that were beginning to go to higher-yielding stocks and real estate. Investors are seeking higher returns instead of safe bank deposits since prices are running far ahead of the interest rates that banks are offering, leading to negative real returns.

"The hike in rates comes after most of the banks raised their deposit rates by 75 to 100 basis points. We have just realigned the lending rates to deposit rates," said Kamlesh Rao, executive vice-president at Kotak Mahindra Bank.

Many bankers have suggested that the rates may rise further after the release of monetary policy in April 2010, which is widely expected to see an increase in RBI's policy rates as a step to curb inflation.