Consumers fret as State Bank hikes interest rates

Thursday, 26 June 2008, 07:00 Hrs
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Mumbai: India's largest commercial bank, the State Bank of India (SBI), Thursday hiked its primary lending rate by 50 basis points in what is expected to trigger similar moves by other financial institutions and put further burden on corporate and individual creditors.

The hike to 12.75 percent, which will make loans costlier, takes effect Friday, and comes in the wake of the central bank's decision earlier this week to revise upward both its short-term lending rates and the minimum cash commercial banks have to hold against deposits.

The decision was taken by the SBI's Asset Liability Committee, according to the bank's chief financial officer Ashok Mukand. "We are now restoring our PLR which we had reduced some time back. All loans linked to the PLR will come under the revision."

The bank had hiked its prime lending rate April 8 this year by 75 basis points to 12.25 percent per annum. Both these moves particularly put pressure on housing loans - where creditors saw both the monthly premia and the tenure of the loan go up significantly.

The bank's home loan portfolio alone is around 380 million ($9.5 billion).

The Reserve Bank of India (RBI) had Tuesday hiked the repo rate - or the interest charged on the loans extended to commercial banks by 0.5 percent, while also increasing the cash reserve ratio by an equal quantum.

"When I took a home loan some five years ago, I was making a monthly repayment of 20,200 per month. Now, the same has gone up to 24,800," said Ranjay Singh, an executive with a global software house.

"But what is a double whammy for me is the tenure of the loan. Instead of 20 years originally, the tenure is for 26 years. This is killing. I am already burdened with high inflation we are seeing today. I don't know where the interest rate will go now!" he rued.

India Inc. too has criticised the RBI's move to increase the repo rate and cash reserve ratio.

The Federation of Indian Chambers of Commerce and Industry, a leading business lobby, said the industrial sector has slowed down somewhat, and that the rate hike would accentuate that further.

This would slow the growth of the economy, it said, and advised the apex bank to take a re-look at the interest rate structure.

Another industry federation, the Associated Chambers of Commerce and Industry of India, said the RBI measures would create liquidity crunch and hike interest rates, hampering industry's domestic expansion plans.

Some financial institutions like the private sector HDFC Bank and Yes Bank have already hiked their prime lending rates and analysts said with the SBI now announcing its own rate hike, others, too, were expected to follow suit.

"The hike in prime lending rate will directly affect the consumer loans, home loans, and personal loans. All these are bound to go up," said Punjab National Bank chairman K.C. Chakrabarty, predicting a hike of around 50 basis points.

Echoing a similar sentiment, Bank of India chairman and managing director T.S. Narayanasami said both the cost of deposits and lending rates are set to rise.

"We have to yet assess the impact of inflation before loading an increase in interest rates so that our asset portfolio is not weakened. We will now have to live with lower net interest margins," he said a day after the central bank announced the rate hike.

Finance Minister P. Chidambaram, who has been facing opposition ire for spiralling prices, had already defended the Reserve Bank's move, as India's annual rate of inflation has scaled a 13-year peak of 11.05 percent.

"These steps are necessary in the face of rising inflation due to relentless increase in crude oil prices. These steps are expected to have a salutary effect," he said referring to the hike in the repo rate and cash reserve ratio.

"In view of the criticality of anchoring inflation expectations, a continuous heightened vigil over ensuing monetary and macroeconomic developments is warranted to enable swift responses with appropriate measures as necessary, consistent with the monetary policy stance," the RBI had said in a statement after announcing the rate hikes.
Source: IANS
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