ICICI Bank moves up lending rates by 50 bps

ICICI Bank today raised lending rates, including those for home loans, by 50 basis points to protect its margins. The hike comes just a day after the Reserve Bank of India raised its repo and reverse repo rates by 25 basis points.

More banks are likely to follow suit and effect an upward revision in their lending and deposit rates. Among them are IDBI Bank and Allahabad Bank, said market sources.

As for ICICI Bank, today's is the second hike in lending rates effected by the bank in a span of one month. It had raised home loan rates by 50 basis points on May 5. With today's hike, the new floating home loan rate will be 9.5 per cent . It will be 10.75 per cent for the fixed rate option.

The country's largest private sector bank has raised the prime lending rate more aggressively for corporate lending. It raised its corporate prime lending rate by 100 basis points, from 11.75 per cent to 12.75 per cent, in March. Now the new prime lending rate will be 13.25 per cent.

The cost of funds (for ICICI Bank) have risen by 150 basis points since September 2005. However, the bank did not pass on the rise in cost of funds fully to customers.

Generally, the rates in the financial system soften in the April-May period. But it did not happen this year, deputy managing director, ICICI Bank, Chanda Kocchar said.

In fact, the yields on 10-year government bonds moved up by 40-50 basis points and the RBI's decision to hike repo and reverse repo rates signalled that softening had not happened. It was in this backdrop that the bank decided to hike the rates, she said.

Asked about the trend in rate movements, Kocchar said "the rates will not be soft". She, however, did not elaborate on the extent of upward movement that could take place.

The bank's margins have been under pressure as it has aggressively mopped up resources by offering high interest rates (above 8 per cent) for bulk deposits, analysts said.

Besides providing resources for credit demand, the bank has to make a provision for redeeming high-cost bonds worth Rs 30,000 crore, a legacy of the erstwhile ICICI, they said.

The bank did not foresee any drop in credit demand due to the rate hike as it was driven by fundamental factors like the need for housing in retail segments and demand emerging from economic growth for the corporate side, she said.

ON Singh, chairman and managing director of Allahabad Bank, said the RBI's decision to hike repo rates was a signal for revising the interest rate on deposits.

The bank would assess the implication of the decision and revise the deposit rates next week. Thereafter, as a step to protect margins, the bank would also look at increasing lending rates.

IDBI Bank would also be holding a meeting soon to take a decision on revising its interest rates , said a banking source.

According to an official source in the Bank of Baroda, most public sector banks were of the view that since there was abundant liquidity in the market, this was a good time to increase the asset book without disturbing the rates immediately. The banks could later hike the rates when the liquidity showed sign of waning, he added.

A UTI bank source said there was no need to hike the benchmark prime lending rate. Since most of the loans had been disbursed at floating rates, a mere change in the spreads over PLR by one-to-one negotiations with clients would serve the purpose, he felt.