The country’s biggest lender, State Bank of India (SBI), announced a token increase in its base rate, softening the blow of an increase in cost of funds for its new borrowers.
SBI’s new base rate, the benchmark for all other loans, will be 7.6 per cent for the quarter till December 31, compared with 7.5 per cent. This is SBI’s first increase in base rate since the new lending rate system was introduced on July 1, even as the Reserve Bank of India (RBI) raised its key repo rate by 75 basis points in the same period.
The bank expects to maintain its net interest margin after the increase, an official said, declining to be identified. The bank has also increased lending rates for its existing borrowers under the benchmark prime lending rate by 25 basis points to 12.50 per cent. Both the rates come into effect on October 21. The bank, which raised its deposit rates in mid-August and September-end, left its deposit rates unchanged.
ICICI Bank, the second biggest lender, raised its base rate by quarter of a percentage point to 7.75 per cent from October 6, while HDFC Bank’s base rate is at 7.5 per cent. The base rate of Punjab National Bank and Bank of Baroda is at 8.5 per cent.
SBI Chairman O P Bhatt last week hinted at rising borrowing rates due to tight liquidity and higher cost of funds. The bank, which accounts for 18 per cent of all loans from the banking sector, revised its base rate within a fortnight of leaving it unchanged at 7.5 per cent “for the time being”. A month ago, SBI had said it expected lending rates to remain stable for three to six months.
It had last raised lending rates around two months ago.
“There has been a huge amount of pressure on liquidity. It is not just getting tighter, but liquidity has become more volatile in the system,” Bhatt had said.
Bulk deposit rates have risen in the system, Bhatt said on October 15. SBI raised bulk deposit rates by more than 100 basis points recently. It also raised term-deposit rates twice in the last two months. Besides rising cost of funds, the bank will also have to factor in provisioning for loans.
“Against this backdrop, interest rates will go up on the lending side,” Bhatt then said.
SBI is among the few lenders that did not raise its base rate after Reserve Bank India’s mid-quarter policy review on September 16. Since March, RBI has hiked its repo rate by 125 basis points and reverse repo rate by 175 bps in an attempt to curb inflation.
The cost of deposits for the banking industry has been the lowest in a year during the quarter ended September 30. It began to rise from August. SBI’s cost of deposits at the end of June 2010 stood at 5.27 per cent, down from 6.06 per cent at end of September 2009.
Liquidity in the banking system has come under severe pressure since mid-September, due to advance tax outflows and on concerns that Coal India’s Rs 15,400-crore initial public offering, which opens Monday, may squeeze it further. RBI has had to pump an average Rs 75,600 crore into the banking system each day through its repo auction, a reflection of the tight liquidity condition.
