Interest rate hikes reach homes, firms

SBI ups prime rate by 25 bps, HDFC by 50; others follow.

Corporations and individual consumers will have to pay more on their loans from today, with the country's largest bank, State Bank of India, and the biggest mortgage lender, Housing Development Finance Corporation (HDFC), raising their prime lending rates by 25 and 50 basis points, respectively. One basis point is one-hundredth of a percentage point.

Punjab National Bank (PNB) and Bank of Baroda, too, have hiked their prime lending rates. While Bank of Baroda hiked its rate by 50 basis points, PNB toed the SBI line and raised its PLR by 25 basis points.

With this, the three public sector banks have their PLR pegged at 11.5 per cent. Other public sector banks are set to follow suit over the next few days.

HDFC raised its interest rates by 50 basis points to 12.25 per cent, but ICICI Bank, the biggest mortgage lender among banks, continued to follow a "wait and watch" policy.

ICICI Bank has been the most aggressive in raising rates since banks started feeling intense pressure on margins beginning January 2006. ICICI Bank Deputy Managing Director Chanda Kochhar said: "We are keeping a watch on our cost of funds, and that's a continuing process."

Public sector banks had raised their PLRs by 50 basis points on May 1, even though the Reserve Bank of India had left its key rates untouched in its April policy, after hiking them by 25 basis points in January.

Subsequently, the RBI raised its policy rates in June, and again, a week ago, the central bank raised its reverse repo and repo rate by 25 basis points each. The reverse repo is the rate at which the RBI takes money from the banking system, while it infuses money through its repo window.

SBI said term premiums of 50 basis points would be added for loans with a maturity period of three years and above, and credit risk premiums based on the bank's credit risk assessment would also be added to its PLR.

With the latest hike, HDFC has increased its lending rate by 150 basis points in 2006. A 50-basis-point increase in the interest rate leads to an increase in the repayment term by about one year.

ICICI Bank's benchmark advance rate (linked to both corporate and home loans) is 12.25 per cent through four hikes since January, when it was ruling at 11 per cent.