SBI lifts prime lending rate 75 basis points to 14%; demand for homes, cars to fall

MUMBAI: The country's largest bank, State Bank of India , on Tuesday raised deposit and lending rates steeper than rivals, which may push up cost of funds across industry as well as for borrowers. The bank's profitability, which is already under pressure due to rising interest rates in the last few months, may get eroded further as it will pay more for funds. The bank raised its benchmark prime lending rate 75 basis points to 14%, and the base rate below which it will not lend to anyone by the same amount to 9.25%.

Deposit rates on shorter tenors were raised as much as 225 basis points. A basis point is 0.01 percentage point. A 14-day deposit at SBI will return 6.25%, against 4% earlier, while one-year returns remain at 8.25%. New rates are effective May 12. "The raise is quite steep and is a blow to consumers," said Harsh Roongta, chief executive at consumer finance portal apnaloan .com. "The demand for homes, cars and consumer durables will all fall." SBI joins ICICI Bank and the rest in raising rates after the Reserve Bank of India increased policy rates by 50 basis points to 7.25% on May 3.

The RBI's objective of raising rates for the past one year to keep prices under check may at last be yielding results with banks passing on the higher costs to customers. SBI's rate increase is also partly catching up with rivals as it was stubborn in not raising the rates under previous chairman OP Bhatt. "Last couple of times SBI had not increased rates, so they are now aligning with other banks," said MD Mallya, chairman of Bank of Baroda as well as the Indian Banks' Association "If the difference is too much, we will also have to increase the rate. It could go up by 25-50 basis points."

Furthermore, SBI may be aiming to boost growth and adjust its mismatch between loans and deposits, hence, offering more on the shorter tenor deposits.

"We offer 7% on 91-180 day tenure deposits. They are just falling in line with the market. It is also possible that they are looking to shore up their liquidity at the shorter end,'' said MV Nair, chairman, Union Bank of India .

Source: EconomicTimes