rediff.com: Banks may hike lending rates this week

The State Bank of India may kick off a round of lending rate increases in the Indian banking sector on Thursday following the central bank's monetary tightening to prop the rupee.

An SBI official said the bank could raise its prime lending rate by 75 basis points on Thursday.

"We may raise our PLR by 75 basis points on Thursday in response to the rate hikes by the central bank," a senior SBI official said. The possible rate hikes are based on the view that central bank measures to defend the rupee will not be reversed immediately, said the official, who declined to be named.

The official said the bank would also raise its deposit rates across most maturities by 50 basis points.

The Reserve Bank of India raised the key bank rate on July 21 by 100 basis points to 8 per cent, and hiked banks' cash reserve ratios by 50 basis points to 8.5 per cent in two stages, effective on July 29 and August 12.

The measures were announced after the rupee breached the 45 per dollar level for the first time.

The impact on the rupee was short-lived. It continued its decline and hit a fresh low of 45.32 on Wednesday, after closing Tuesday at a record low of 45.15/16.

Analysts said other state-run banks like Bank of Baroda, Bank of India and Corporation Bank would follow the SBI in hiking rates.

The SBI and its seven associates account for 25 to 30 per cent of total commercial bank deposits and credit business and the SBI generally sets the trend in the banking sector.

"Most state-run and the SBI associate banks will follow suit. But the private sector banks are unlikely to hike rates as most of their lending rates are much higher than the state-run banks," Vimal Jain, banking analyst at Prime Broking (India), said.

Large state-run banks and institutions had reduced lending rates in April after the RBI cut key interest rates.

The SBI's prime lending rate is 11.25 per cent, while private sector ICICI Bank's lending rate is 13.50 per cent.

Financial institutions like the US-listed ICICI and the Industrial Development Bank of India are expected to hold back.

"We will watch the impact of the rate hikes on a sustained basis before we take a decision on our lending rates. We still believe the rate hikes are temporary," Kalpana Morparia, senior general manager with ICICI, said.

Besides, funding for such financial institutions is normally of a longer tenor than that of banks, she said.

All the three term-lenders -- ICICI, IDBI and IFCI < -- currently charge a prime rate of 12.50 per cent.

Analysts and bank officials said commercial credit growth would not be affected by the likely rise in costs for borrowers.

"Credit growth will not be impacted by the hike. Credit is more need-based and corporates will take loans despite the rate hikes," the chairman of a large state-run bank said.

Indian banks' average year-on-year credit growth has been 22.9 per cent in the quarter ended June 30, against 14.4 per cent in the year-ago period.

Analysts said banks like SBI would be able to protect interest margins and maintain profitability through higher volumes.

Interest margins for state-run banks have fallen from 4 per cent at the end of March 1997 to less than 3 per cent in April 2000.

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