News & Events

 Home and car loans to cost more as PSU banks hike lending rates

 September 8th, 2015

State-run banks may not have formally raised their base lending rates despite a spike in market interest rates, but are charging even their marquee customers such as Housing Development Finance Corporation (HDFC) more, indicating that cost of home and car loans may rise.

With borrowers such as HDFC paying higher interest rates, bankers expect lending rates to firm up across the board as the Reserve Bank of India's recent monetary tightening measures begin to bite.

The nation's biggest mortgage lender, which was lent money by banks at base rate, is now contracting lines of credit at 50-75 basis points higher than base rates, said two persons familiar with the matter. HDFC may now be borrowing at 10.5% or 11%.

HDFC provides home loans in the range of 10.15% to 10.40% and if liquidity conditions continue to be tight, it may be forced to raise rates for its borrowers. Its subsidiary, HDFC Bank, the most profitable lender, has raised the base lending rate by 20 basis points to 9.80%.

"Several banks signed contracts with HDFC to lend at rates ranging from 10.50% to 11% and on a condition that they cannot repay the loan within 90 days of availing it," said a banker who did not want to be identified. "Since the finance minister does not want banks to raise lending rates, banks have raised the spread on base rate to prevent margins from shrinking."

 HDFC Bank increases lending rates

 September 8th, 2015

HDFC Bank has become the first major lender in the country to increase its lending rate in the wake of Reserve Bank of India's measures to tighten liquidity. The bank has increased its base rate to 9.8% from 9.6% with effect from August 3, a move that would affect all corporate borrowers who have availed of floating rate loans.

The hike, however,will not impact home loan customers as mortgages sold by HDFC Bank are on behalf of its parent which has not revised its benchmark prime lending rate yet.

Last week YES Bank was the first to revise its base rate. Some other private banks, including Axis Bank, have raised their short-term deposit rates. "If the measures last, I would expect that cost of deposits to rise and this will have an impact on asset pricing," said Sunil Kaushal, chief executive for India and South Asia, Standard Chartered Bank. Interest rates have been inching up gradually with RBI planning to hold its liquidity tightening measures for the medium term.

Although both the Prime Minister and the finance minister have gone out of their way to announce that the central bank's measures are "temporary" , RBI has told banks that there is no such commitment. In its meeting with banks, the central bank has refused to provide a timeline for the measures. However , RBI has told banks that they have the headroom to absorb some of the cost arising out of the increase in shortterm rates since they have reduced their base rate by only 60 basis points as against a 100 basis point reduction in the repo rate by RBI since last year. "We wanted a non-disruptive adjustment to higher interest rates at the short end. And that has been happening and that is going to happen. Whether it will transmit to the long end is uncertain. As I said, it might well transmit, but our intention is to invert the yield curve such that short rates are higher, and the long rates stay where they are. That is good for the economy," said RBI governor D Subbarao while announcing his quarterly policy review on Monday.