In order to push the existing customers to the new base rate system for loans, banks are increasing their benchmark prime lending rates.
Recently Punjab National bank and Union Bank of India have raised their BPLRs. PNB has raised its rate to 11.75 per cent from 11 per cent with effect from August, while Union Bank has raised the rate to 12.25 per cent from 11.75 per cent with effect from August 4. In the coming months more banks are likely to follow the suit.
One of the reason behind this move is, most probably banks want to account for the rising cost of deposits and to protect their margins. According to some bankers, banks might also want to push existing borrowers to the base-rate linked lending regime by increasing the costs for BPLR-linked borrowers.
However banks have requested the RBI to announce a sunset clause with June 30, 2011 as the deadline for moving all the existing bank loans to the new base rate-linked lending regime.
Another reason may be banks do not want to get involved in litigation if their clients, especially who have taken project loans, at the time of renewal of loans don’t want to move to the base rate linked lending regime from the former BPLR regime. Most of the banks have set their base rates in the range of 7.50-8.50 per cent.
Also, banks don’t want to be burden of administering two benchmark lending rates.
A senior Union Bank of India official said, “In the current scenario of rising interest rates, our deposit costs are increasing. Hence, we have no choice but to realign the BPLR to protect our margins.”
But the public sector bank official cautioned that existing borrowers should not blindly move to base rate system as banks increase BPLRs just because it looks a bit cheaper in comparison to BPLR based-lending, as there are possibilities that banks will also review their base rates as they raise their deposit rates.
Union Bank of India has raised its term deposit rates across different maturities by 25 to 100 basis points with effect from August 4.
For maturities of 1 year bank has raised rates by 25 basis points from 6.50 per cent to 6.75 per cent. While for short-term deposits of 91 days to less than 6 months and 6 months to less than 9 months, banks has raised interest rates from 3.5 per cent to 4.5 per cent and 4.5 per cent to 5 per cent respectively.