Double-digit lending rates are back, early respite unlikely
Home loan rates hit 10%, as do preferred corporate loans. Loan rates for retail borrowers as well as op-rated companies have crossed 10 %, with the cost of funds having risen in the past three months due to the liquidity crunch that banks have been facing.
After about two years, home loan rates have crossed the 10 % mark, after the latest round of increases which came into effect from the beginning of the month. Barring a few lenders and State Bank of India (SBI), most public sector banks are now charging 9.25-11 % on home loans, depending on the tenure. Barely two months ago, were these rates 8-8.5 %.
SBI Home Loan, still offering a fixed-cum-floating loan, is charging 8.5 %. The country’s largest bank is offering a discount of 100 basis points (bps) over its card rate, which is 9.5 %, on new home loans. The discount is offered for the first year of the loan. However, if the base rate increases, so will the effective lending rate.
A loan to the highest rated company has also crossed 9 %. Bank of Baroda, for example, is charging a maximum of 4.25 % over its base rate of 9 % to its best corporate clients. With such a base rate for most public sector banks, it is difficult for any to lend below 10.5 to 11 %, bankers said.
“If 9 % is the base rate, and you add cost of the cash reserve ratio, which comes about 60-70 bps and another 40-45 bps for the statutory liquidity ratio, it goes above 10 %. Over that, add the transaction cost and profit margin,” said a senior official of a public sector bank.
More bad news may follow, as there is growing expectation that interest rates are going to harden further, as Reserve Bank of India is expected to tighten its monetary policy stance by increasing interest rates by 50 bps in January.
According to Vaibhav Agarwal, vice president of research, Angel Broking, lending rates are still 150 to 200 bps below the peak levels witnessed before the crisis. SBI Chairman O P Bhatt today said an interest rates rise is on the cards but he did not expect RBI to raise these by more than 25 bps during the third quarter review of the annual policy on January 25.
Backdrop, prospects
The increase in the lending rate is due to a steep increase in deposit rates over the past three months. Retail deposit rates have moved up around 200 bps since October, following the liquidity crunch. The lacklustre pace of deposit growth in the current financial year, far below credit offtake and resulting in widening the asset liability gap, has forced banks to increase deposit rates.
Some banks are now offering 9.75 % for certain maturities. Movement in short-term rates were steeper in the October-December quarter, with three-month certificates of deposit rates up by 250 bps during that period.
“So far, what we have seen in this financial year is that growth has not been impaired because of rising interest rates. Even the demand for loans is high, despite higher rates. We can expect companies to make more judicious utilisation of capital as its price goes up. Currently, companies are updating capacity utilisation by 70 to 85 %. So, rising interest rates will not affect growth momentum to that extent in the next three months at least,” said Madan Sabnavis, chief economist, CARE Ratings.
In an interview to Business Standard last week, KV Kamath, chairman of ICICI Bank, had warned that double-digit lending rates could pose a big problem.
“It’s a very tricky situation. The ideal situation is to keep rates low — from the angle of domestic growth dynamics as well as global comparisons. Our interest rate structure is already completely out of sync with the West and also with other Southeast Asian economies, who are our immediate competitors,” Kamath, an advocate of benign interest rates, had said.
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