The Hindu Business Line : Get ready for higher interest rates, say bankers

Mumbai March 30 Interest rates are sure to harden, say bankers reeling from the RBI's `triple whammy'. The central bank's hike in repo rate by a quarter percentage point to 7.75 per cent, increase in the Cash Reserve Ratio by 50 basis points to 6.50 per cent, as well as the cut in interest (from one per cent to 0.5 per cent) on eligible CRR balances will push up interest rates for consumers and hurt the profitability of banks.

The first to announce a hike was Yes Bank, which raised its prime lending rate (PLR) by 75 basis points to 14.75 per cent, effective April 1. "This is in accordance to the prevailing market conditions and today's hike in CRR and repo rates. This is despite the fact that the bank has negligible retail assets and capital markets exposures which are subject to higher provisioning," said a press release from the bank.

Lending rates of most private banks are at 14-14.75 per cent, while the public sector banks price loans at 12.25-12.50 per cent. The prevailing deposit rates are at about 9-9.5 per cent.

Bankers feel another hike in PLR is on the anvil. "There will be a realignment in lending rates and customers who have been enjoying sub-PLR rates will definitely see a mark up. There will be less money to chase and since it is costlier now, there will be less people to chase the available money," said Mr M.B.N. Rao, Chairman and Managing Director, Canara Bank.

Banks are expected to see a drop of around 6-8 per cent in their profits, said analysts.

PSU banks, which have so far been holding interest rates on home loans following a diktat from Union Finance Minister, Mr P. Chidambaram, may not be able to extend the protection to new borrowers, said a senior official from a public sector bank.

Banks currently maintain Rs 150,000 crore as CRR with the RBI, and the additional burden of maintaining the higher 6.5 per cent as CRR and the loss of interest on the eligible balances is likely to shave off over Rs 1,600 crore of their revenue.

SBI, for instance, will lose around Rs 200 crore, said a senior official.

Deposit rates are likely to remain unchanged although banks have been offering special deals at the end of the year.

CALL RATES

Treasury officials expect an inevitable rise in interest rates and believe that housing loan rates could go up by almost one percentage point. They also said credit offtake will slow down.

"The deposit rates and the lending rates may move up by 50 basis points each," said Mr J. Moses Harding, Head-Wholesale Banking, IndusInd Bank.

"It is a sudden move and 10 year yields are expected to touch about 8.25 per cent and liquidity will further tighten and call rates may move up by two to three percentage points," said Mr P. Mukherjee, Senior Vice-President (Treasury), UTI Bank.

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