ICICI, SBI to hike home loan rates

ICICI Bank, the country's second biggest mortgage lender, has decided to increase interest rates on home loans by 50 basis points across the board before end of March 2006.

State Bank of India (SBI), the country's largest bank and the third largest mortgage lender, too may hike its home loan rates soon, sources said.

ICICI Bank also expects interest rates on car loans to increase by 25 to 50 basis points. The bank, however, does not expect interest rates on personal loans and credit cards to go up as margins on these loans are still good.

SBI is unlikely to hike its prime lending rate (PLR) and instead increase the spread between the PLR and home loan rates. In other words, the existing customers will not be affected but the new customers will be required to pay more.

ICICI Bank's head-retail banking, V Vaidyanathan, said the bank was thus far reviewing the impact of hardening of cost of funds and has now decided to pass on the increased cost to customers anytime before the end of March 2006.

ICICI Bank's move follows the leading mortgage lender, Housing Development Finance Corporation's (HDFC) recent announcement of a 50 basis points hike in interest rates across all segments.

HDFC took the decision after a 25 basis points increase in the reverse repo rate by the Reserve Bank of India (RBI) on January 24. HDFC's prime lending rate (PLR) stands increased to 11 25 per cent and its floating rate is 8.0-8.75 per cent depending on the size of the loan.

Industrial Development Bank of India (IDBI) and LIC Home Finance too has increased interest rates on their home loans.

IDBI has, however, refrained from increasing its PLR. An increase in the PLR results in an increase in interest rates on existing floating rate loans also.

"There is tight liquidity in the banking system. Consequently, home loan rates should rise because of its wafer thin pricing," ICICI Bank's Vaidyanathan said on the sidelines of a retail banking seminar organised by the Indian Banks' Association (IBA).

Vaidyanathan said the current round of interest rate hikes won't affect demand for credit, but continuation of the current trend of hardening rates over a longer period of time would act as a dampener.