New Year blues - SBI hikes lending rates
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New Year blues - SBI hikes lending rates

By SiliconIndia   |   Wednesday, 27 December 2006, 06:00 Hrs
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Mumbai: With the New Year round the bend, smiles on many faces will be lost as the banks mark up lending rates.

Bank borrowers are in for a surprising turn out as funds become dearer. State Bank of India, the country's largest lender, made known its plans of a 50 basis points rise in its prime lending rate (PLR) to 11.5 percent effective from December 27th.

Earlier this month, private sector banks - ICICI Bank and HDFC Bank hiked their lending rates, following the 50 basis point increase in the Cash Reserve Ratio to 5.50 per cent by the RBI on December 8th. Following suite, the public sector Oriental Bank of Commerce revised PLR by 25 basis points to 11.75 per cent.

As per analysts, other banks will follow as spreads (difference between lending and deposit rates) come under pressure with a rise in cost of deposits.

An SBI official said the hike in the lending rate would partly neutralize the impact of the recent mark up in CRR and a rise in cost of deposits. SBI has pushed up deposit rates twice this year by about 100 basis points. (SBI had lifted term deposit rates by 25 to 75 basis points on December 11th.) SBI had earlier increased its PLR in April by 50 basis points and later effected an upward adjustment by another 25 basis points to 11 per cent in August.

O.P. Bhatt, Chairman of SBI, recently told business line that the CRR hike would impact banks' profitability in two ways. One, CRR does not earn interest while the RBI impounds funds; second, the impact on over-all liquidity will push the cost of funds for banks.

With the revision in PLR, all advances linked to it, including working capital loans, will be adjusted with immediate effect. About 70 per cent of SBI's existing loans are on floating basis, linked to PLR. This will help the bank to improve its interest income from its existing loan book, said an analyst.



After the CRR hike, ICICI Bank was the first to raise lending rates, followed by HDFC Bank. SBI's PLR at 11.50 per cent is still lower than that of ICICI Bank at 13.75 per cent and 13 per cent of HDFC Bank.



"A section of the market was worried over whether PSU banks would be able to raise their lending rates but with SBI going ahead, other PSU banks are expected to follow. It will protect banks' margins," said Vishal Goyal, Banking Analyst, Edelweiss Research.



SBI shares rose 2.62 per cent to Rs 1,245.90 on BSE from Friday's close of Rs 1,214.05.


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