Unidirectional Graph – Naveen Kumar

Banks up lending rates, more in the offing

The upward movement of interest rate continues unabated. Most of the banks have increased their lending rates following the 50-basis point (bps) hike in key policy rates and saving accounts interest rate by the Reserve Bank of India (RBI) on 3 May 2011. (A basis point is one-hundredth of 1 per cent.) Base rate is the minimum rate at which a bank can lend to its customers and interest rates on all loans (home loan, auto loan, personal loan, and so on) are linked to the base rate. Any increase in base rate directly affects existing as well as new borrowers as the EMI outflow is bound to go up. The RBI, in its effort to lower inflation, increases key rates to suck liquidity from the banking system—as a result, banks are left with less money to lend and so they increase their lending rates. India’s largest bank, State Bank of India, upped its base rate by 75 bps from 8.50 per cent per annum (p.a.) to 9.25 per cent p.a. with effect from 12 May 2011. Other public sector banks such as Punjab National Bank and Canara Bank have already raised their lending rates by increasing their base rate by 50 bps to 10 per cent, with effect from 5 May 2011. Bank of Baroda and Union Bank of India followed suit, increasing their base rates to 10 per cent effective 6 May 2011. Among private sector banks, ICICI Bank, Kotak Mahindra Bank and HDFC Bank hiked their base rates to 9.25 per cent. Existing auto loan borrowers are suffering the double whammy of rising fuel prices and interest rate hikes. In fact, these factors have made many people postpone their car purchase decision. The impact is visible as auto sales have slowed down—domestic car sales grew just 13 per cent in the month of April, the least in the last two years. Many experts are of the opinion that there may be another 25-50 bps hike in key rates in the coming months, after which rates may stabilise or start coming down. So, if you have been waiting for interest rates to come down to take a home, auto or personal loan, it’s quite likely that you might have to wait for a little longer.

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