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SBI home loans to get expensive as bank hikes base rate by 5 bps

Last week, SBI increased 2-10 year retail term deposit rates by 10-25 bps due to tight liquidity (shortage of cash) in the banking system. This was the second hike in deposit rate in the past one month.

business Updated: Apr 02, 2018 21:29 IST
Hindustan Times, Mumbai
SBI home loan,Existing home loan,State Bank of India
Home loans taken before April 2016 and after July 2010 were linked to base rate.(HT File Photo)

Existing home loans from the State Bank of India (SBI), the country’s largest lender, will get marginally expensive with the bank increasing its base rate to 8.70%, up 5 basis points (bps), from 8.65%, in what analysts see as a first sign of gradually hardening interest rates. A basis point is one-hundredth of a percentage point.

This is the first increase in the base rate in the last five years. The bank has also increased its benchmark prime lending rate (BPLR) by 5 bps to 13.45% from 13.40%. The last rate increase in both base rate and BPLR happened in 2013. Since then, rates have been on a downward trajectory. “Around 20-25% loans in the industry are still linked to base rate,” said Udit Kariwala, associate director-financial institutions, India Ratings and Research.

SBI attributes the base rate hike to the increase in term deposit rates. “The marginal increase in base rate is due to the upward movement in term deposit rates. As the cost of deposits goes up, it reflects on the base rate as well,” said PK Gupta, managing director, SBI.

Last week, SBI increased 2-10 year retail term deposit rates by 10-25 bps due to tight liquidity (shortage of cash) in the banking system. This was the second hike in deposit rate in the past one month.

“Deposit growth has come off in the last couple of quarters. With credit growth showing some green shoots (though not driven by capital expenditure) and deposit growth being tepid, banks are repricing deposits. In general, in a credit growth scenario, the pricing power of banks tend to go up,” said Kariwala.

Home loans taken before April 2016 and after July 2010 were linked to base rate. From April 2016, all home loans offered by banks are linked to marginal cost of funds-based lending rates (MCLR).

The increase in base rate comes after banks, including SBI, Punjab National Bank and ICICI Bank Ltd increased their MCLR by 10-20 bps in March — the first hike in interest rate after the MCLR system came into effect.

Analysts expect lending rates to go up in the banking system. “There will be a gradual hardening of the interest rates. Even before the regulator signals it in the monetary policy, the banking system has recognised the need for increasing the interest rates,” said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services Llp.

First Published: Apr 02, 2018 21:14 IST