Banks not in hurry to up corporate lending rates

Bankers have adopted a wait and watch policy before increasing their deposits and corporate lending rates even as the retail lending rates have already started inching up.

With the inflation rate rising to a three-and-a-half year high of 7.51 per cent, the bond story is virtually over. The yield on the benchmark 10-year government paper which went up to 6.30 per cent on Friday may touch 6.50 per cent over the next few days, senior bankers said. In October last year, the 10-year yield was ruling at 4.94 per cent, over 8 percentage points lower than its April 1997 level of 13 per cent.

"Like all good things, the bond party is over. Now, we need to focus on our loan book if we want to make money," said a bank chairman. However, banks are not in a hurry to raise their lending rates. "We need to watch the inflation scenario for some time before taking any decision on rate hike. We may wait till the Reserve Bank of India's October credit policy for any signal," said another bank CEO.

Industry observers, however felt that the Indian central bank is unlikely to hike its key bank rate which is at its three-decade low of 6 per cent and repurchase rate (4.5 per cent). "The credit pick-up is not spectacular and the money supply (M3) is well within the Reserve Bank's targeted level. Since the hike in inflation is not demand driven, the Reserve Bank is unlikely to hike the rates," analysts said. The central bank in its May credit policy projected a 5 per cent inflation rate for the fiscal year 2004-05.

Senior bankers pointed out that there is ample liquidity in the system and banks are not under pressure from the corporates to lift funds. "If we hike the rates at this juncture, we may end up killing the recovery cycle. We will wait for the signal from the central bank," said one banker.

However, there is a consensus in the banking community that the retail loans like home loans and car loans are set to go up. "The fall in home loan rates is sharper than the fall in the yield on sovereign paper. Particularly in the last three years, there has been a steep fall in home loan and car loan rates. They will inch up now," said the retail head of a private bank. Housing loan major Housing Development Finance Company (HDFC) has already raised its home loan rate by a quarter percentage point.

With the inflation rate touching 7.51 per cent, the real interest rates on all bank deposits have turned negative. However, banks are not in a hurry to raise the deposit rates now as they feel that the rate of inflation will come down.