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Wednesday, January 29, 2014

Banks may not raise home and car loan rates immediately

Retail home and car loan borrowers may have little to worry despite a hike policy rate by the Reserve Bank of India to control inflation. Chief executive of large commercial banks have indicated that they are not in a hurry to raise lending rates yet.

The RBI on Tuesday raised repo rate - the rate at which they lend customers- - by 25 basis points to 8% signalling that rates would remain at elevated level for sometime.

"Yes, of course, there will be a little bit of rise but how much of that rise can be passed on I have to see the capacity of the people who have taken money from me (SBI) as well," said Arundhati Bhattacharya, chairman of State Bank of India (SBI) which has pegged its base rate at 10%-lowest in the industry.

Transmission of policy rates - whereby banks pass on a hike or a cut in policy rate - to their customers is unlikely to happen when repo rate is revised. This is mainly because banks borrowing from repo window is less than 1% of their total borrower, however repo rate signals the direction in which the RBI wants rates to move. "Repo is a very blunt tool. Transmission (of policy action) will only happen when it is actually affecting the cost of funds," said Ms Bhattacharya.

Besides, cost of funds, bankers also factor in demand for credit and competition from peers while tinker with rates. In December, HDFC and ICICI Bank were forced to cut home rates after SBI cut its rates by 10-25 basis points.

Rising stress in the economy, which has resulted in several corporates delaying their payments to banks in recent months, has prevented banks from raising the lending rates. K R Kamath, CMD of Punjab National Bank and chairman of Indian Banks' Association said, "Looking at inflation depositors need be given a better rate. Looking at stress of the assets we need to see that we don't pass on a lot to the borrowers. How do we balance that is what will ultimately decide what sort of transmission will happen."

According to M Narendra, CMD of Indian Overseas Bank there is no scope to revise the rate for retail borrowers, small businessmen and farmers but the bank may consider revising spread rates for other category of borrowers. "Hike in base rate is ruled out since there is limited opportunity to deploy loan to better rates corporates," he said.

Depositors, on the other hand, may have some reason to cheer since some of the banks may raise rates for select buckets. Banks may be under pressure to mobilise funds to replenish deposits that are due to mature in last quarter, which may force them to pay higher rates to attract deposits. Deposit mobilisation is at its peak in the last quarter of the year since banks try to achieve their annual deposit target for the full year.

Source: Economic Times


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