Banks on move to hike home, auto loan rates

After union budget 2010-2011 banks are on the way to increase interest rates even though the Reserve bank of India (RBI) has not raised its key policy rate yet.

Few of the private sector lenders ICICI Bank, Kotak Mahindra Bank Ltd and the largest mortgage player Housing Development Finance Corp. Ltd (HDFC) have announced closure of special home loan schemes.

Before this some of the commercial banks such as Axis Bank Ltd, Union Bank of India, Canara Bank, Punjab National Bank, Bank of India and IDBI Bank Ltd have discontinued special home loan schemes after RBI had hiked its CRR by 75 basis points in its January review of monetary policy.

One basis point is one-hundredth of a percentage point. CRR is the portion of deposits that banks are required to maintain with RBI.

In the auto loan segment HDFC bank, IDBI bank and Kotak Mahindra Bank have raised interest rates on auto loans.

Kamlesh Rao, executive vice-president at Kotak Mahindra Bank said, “The hike in rates comes after most of the banks raised their deposit rates by 75 to 100 basis points. We have just realigned the lending rates to deposit rates.”

However in case of deposit rates IDBI Bank was the first one to increase the deposit rates by 50 basis points, followed by ICICI bank and HDFC bank.

As from April 1 banks will have to calculate interest on savings accounts on daily basis will thus increase pressure on banks to raise lending rates. Currently banks are offering 3.5% interest on savings accounts, but the actual cost is less as the interest is given on the minimum balance kept between the 10th and the last day of a month.

Also RBI has instructed banks to do away with the benchmark prime lending rate (BPLR) system and introduce the base rate below which no bank can give loans. At present banks keep BPLR high and give loans to 70% of their customers at below BPLR.

After the budget the profits on bonds have also increased. Before budget profit on 10-year bond was 7.83% after budget the profit increased to 7.94%.

HDFC has said although it is withdrawing its special home loan scheme but those who have applied for loans till 27 February and avail of at least part of the disbursement till 31 March will get loans at 8.25% for two years.

Meanwhile ICICI Bank has withdrawn its 8.25% special home loan scheme and hiked auto loan rates.

ICICI Bank spokesman said, “Auto loan rates have been raised by 0.25-0.5% depending on segment and tenure with effect from 5 March.” Thus the new rates for new auto loans will be in the range of 9.75-11%.

While few of the public sector banks such as Union Bank of India, Canara Bank, Punjab National Bank and Bank of India will now be offering loans at the prevailing rates in September when banks launched their special schemes.

Many bankers are saying that they might increase the rates after RBI monetary policy at the end of April as they are expecting RBI might raise its policy rates to fight rising inflation.