Country's third-largest private sector lender, Axis Bank, today said lending rates in the banking industry is poised to move up as loan demand has returned and liquidity is drying up but the hike will not happen 'overnight'.
"Lending rates in the industry will go up in line with the pick up in credit growth in the period ahead. But the hike in rates is not going to happen overnight," Axis Bank's Managing Director & CEO Shikha Sharma said at a Ficci-organised seminar here.
Market participants expect a steady rise in the interest rates in the industry on account of host of factors such as vanishing surplus liquidity, return of credit demand and expected policy tightening by the RBI later this month.
The trend is already visible with a few banks, including leading public-sector lender, Union Bank of India, recently hiking their deposit rates with a view to retain the investor interest.
Reiterating his earlier stand, State Bank of India Chairman O P Bhatt yesterday said that SBI will not hike its lending rates immediately but will wait for further signals from the Reserve Bank's forthcoming annual monetary policy.
The Reserve Bank, which first signalled a clear exit form the monetary stimulus by hiking its cash reserve ratio (bank's deposits parked with RBI) to 5.75 per cent, recently hiked its repo, reverse repo rates (short term lending and borrowing rates) is widely expected to announce further tightening measures at its annual policy on 2010-11.
On the proposed migration to the base rate model from July, Sharma said banks are yet to get clarity and is currently in dialogues with the apex bank on certain aspects such as the future of short-term loans.
However, with the liquidity drying up from the system banks are likely to put an end to cheap short-term loans (some times for rates as low as 5 to 5.5 per cent) to corporate clients in the period ahead regardless of the base rate model, Sharma said.
She cautioned about a slight rise in the level of bad loans in the banking industry, especially from the restructured loans in the coming. "There could be some slippages depending upon the composition of the restructured assets," Sharma said, adding that the new fiscal would be both 'promising and challenging' for banks in the face of changing market scenario.
Credit demand, which was low for a long-time after global financial crisis impacted the ability of individuals and companies to borrow bank loans, has picked up in recent months, she said.
Sharma said there is a need to bring in the long-term funds such as pension and insurance to fund infra projects as the ability of banking system to provide adequate finance to such projects is limited.
