Banks set to hike rates this week

HDFC Bank and UTI Bank may be first off the blocks to raise interest rates on retail and wholesale loans this week. Public sector banks are set to hike their sub-PLR lending rates by 25-50 basis points.

This follows the 25 basis point hike in the reverse repo rate to 5 per cent in the credit policy last week. One basis point is one-hundredth of a percentage point.

Most banks, however, may steer clear of raising the benchmark prime lending rate (PLR), especially when Finance Minister P Chidambaram has said lending rates will not rise because of the hike in the reverse repo rate.

The PLR is the rate at which a prime borrower should be able to borrow money, but all large borrowers with good credentials borrow at a discount to PLR.

Even if banks do not hike their PLR, they are bent on negotiating harder with corporate customers. Even Reserve Bank of India Governor YV Reddy said sub-PLR rates might go up.

This means that if a company was earlier able to borrow at, say, 3 per cent below the PLR, it may now have to pay 2.75-2.50 per cent less than the PLR. So, the spread below the PLR will shrink.

About 60 per cent loans are disbursed below the PLR. The PLR rates of banks vary in the 10.25-10.75 range.

The yield on the 10-year benchmark 7.38 per cent 2015 government paper jumped to a five-month high of 7.27 per cent on Thursday against the previous close of 7.12/13 per cent. It is now hovering at about 7.22 per cent.

The yield on the 12-year 8.07 per cent 2015 government paper, which has emerged as the most liquid paper in the market, touched a high of 7.60 per cent on the day of the RBI annual policy announcement against the previous close of 7.41 per cent. It is now trading at about 7.54 per cent.

If the bearishness in the bond markets continues - the 10-year paper has already risen by 54 basis points in April this year - all banks will be forced to jack up deposit and loan rates.

Many banks have their asset liability committee meetings lined up next week. "We will review the situation at our asset liability committee meeting on whether to tinker with our deposit and lending rates.

"It will all depend on how the money markets behave and on whether our funding costs go up or not," said the credit head of a state-owned bank.