Banks turn the heat on loans | india | Hindustan Times
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Banks turn the heat on loans

india Updated: May 05, 2011 02:13 IST
HT Correspondent
HT Correspondent
Hindustan Times
Reserve Bank of India

At least four banks have raised their benchmark lending rates after Reserve Bank of India governor Duvvuri Subbarao, battling inflation, turned hawkish in his monetary policy by jacking up policy rates by 0.5 percentage points.

Customers braced for costlier loans on Wednesday as the public sector Punjab National Bank and Oriental Bank of Commerce, and private sector Yes Bank announced matching 50 basis point (100 basis points = 1 percentage point) increases in their base rate and prime lending rates. IDBI Bank had made its move on Tuesday itself.

Other banks are expected to follow suit in the coming days. "For better transmission of policy measures announced by RBI, PNB has decided to hike BPLR (benchmark prime lending rate) and base rate by 50 bps (basis points) each to 13.50% and 10%, respectively," PNB said in a statement.

RBI not only increased the repo and the reverse repo rates (the rate at which it lends to and takes cash from banks) by 0.5 percentage point each, it also raised interest on savings bank deposits to 4% from 3.5%, making funds costlier for banks.

“Measures taken by RBI are expected to raise the cost of funds of the bank in the current quarter and also in the forthcoming quarter,” PNB said.

To bring in more transparency, the base rate (below which banks cannot lend) was introduced replacing the BPLR in July, last year. Loans sanctioned up to June 30, 2010 are linked to BPLR while those sanctioned after are linked to the base rate.

Yes Bank responded immediately to RBI by raising the rate on savings deposits to 4%.

“While this benefit extended to depositors is expected to increase the cost of funds of the Bank by less than one basis point, the increase in base rate and prime lending rate will enable the bank to fully absorb the increased costs on account of rising interest rates,” said Rana Kapoor, Yes Bank’s CEO.

Yes Bank has increased its base rate by 50 bps to 9.50%. Its officials said the PLR was also up by 50 basis points but it was not relevant in its current lending portfolio. IDBI raised its base rate and BPLR by 50bps each to 10% and 14.5% respectively.