Within days of the finance minister's advice not to hike lending rates for home loans, ICICI Bank has announced a 100 basis points increase in lending rates – including on home loans. ICICI is the second largest commercial bank in the country and the biggest player in home loans and other consumer loans.
The announcement is likely to force other large banks, including PSU banks, to rethink their lending rates.
ICICI has increased the floating reference rate on consumer loans and home loans to 11.75 per cent from 10.75 per cent earlier. The bank has also hiked its benchmark lending rate (I-BAR) to 14.75 per cent from 13.75 per cent earlier. The hike in its benchmark rate would make corporate borrowings costlier.
Though private sector banks were expected to hike rates, the extent of the hike has caught many by surprise. Most analysts were expecting a more modest rate increase, as there are some signs of a slowdown in consumer credit demand, including demand for home loans. Apart from higher interest rates on home loans, the huge appreciation in real estate prices is also dissuading many potential buyers.
Most private sector banks have increased the lending rates on consumer loans after last week's RBI decision to hike the repo rate by 25 basis points. Interest rates on car loans have been hiked by 50 to 100 basis points over the last week by many banks. Select banks have also hiked rates on personal loans though formal announcements were not made.
ICICI Bank's retail loan portfolio was close to Rs1.18 lakh crore as on 31 December 2006, an increase of more than 50 per cent during the year. Personal loans and credit card outstanding recorded the fastest growth rates - more than 100 per cent for the year - within the retail portfolio, but also contributed nearly half of the retail bad debts of the bank. Defaults are normally high in personal loans and credit cards, but banks make up for these losses through higher lending rates on such loans.
ICICI Bank has also increased the interest rate on 5-year deposits of value less than Rs1 lakh by 125 basis points to 9.5 per cent from 8.25 per cent earlier. These long term deposits are eligible for tax benefits under Section 80C of the Income Tax Act. Deposit rates have steadily gone up in recent months and most banks are now offering between 9 per cent and 9.25 per cent on deposits of 3-year maturity.
The RBI is widely expected to go in for further rate hikes as inflation remains a major concern. Wholesale price inflation for the latest reporting week at 6.11 per cent was way above RBI's target range of between 5 and 5.5 per cent. The RBI's next quarterly policy review is scheduled for end-April, but some analysts expect to announce a rate hike earlier.