Home and car loans to cost more as PSU banks hike lending rates
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State-run banks may not have formally raised their base lending rates despite a spike in market interest rates, but are charging even their marquee customers such as Housing Development Finance CorporationBSE 2.18 % (HDFC) more, indicating that cost of home and car loans may rise.
With borrowers such as HDFC paying higher interest rates, bankers expect lending rates to firm up across the board as the Reserve Bank of India's recent monetary tightening measures begin to bite.
The nation's biggest mortgage lender, which was lent money by banks at base rate, is now contracting lines of credit at 50-75 basis points higher than base rates, said two persons familiar with the matter. HDFC may now be borrowing at 10.5% or 11%.
HDFC provides home loans in the range of 10.15% to 10.40% and if liquidity conditions continue to be tight, it may be forced to raise rates for its borrowers. Its subsidiary, HDFC BankBSE 1.64 %, the most profitable lender, has raised the base lending rate by 20 basis points to 9.80%.
"Several banks signed contracts with HDFC to lend at rates ranging from 10.50% to 11% and on a condition that they cannot repay the loan within 90 days of availing it," said a banker who did not want to be identified. "Since the finance minister does not want banks to raise lending rates, banks have raised the spread on base rate to prevent margins from shrinking."
State-run banks are torn between the need to raise interest rates to protect profit margins amid rising bad loans and the finance minister's desire that they should hold on to lending rates to revive the economy. So, banks are working out ways to circumvent the ministry's orders by charging higher than base rates. Base rate, an average of funding costs, is the rate at which banks cannot lend even to their best customers.
Nothing stops them from charging higher. "HDFC has tied up certain funds through lines of credit as in times like this, it is important to ensure that funds are available when needed," said a company spokesman.
"However, when we draw down the lines, we ensure that the funds are used for assets created on a matching basis with desired spreads. HDFC has a large and strong balance sheet and these amounts are relatively very small. More importantly, we will replace these lines as soon as rates come down as we have the right to do so."
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State-run banks may not have formally raised their base lending rates despite a spike in market interest rates, but are charging even their marquee customers such as Housing Development Finance CorporationBSE 2.18 % (HDFC) more, indicating that cost of home and car loans may rise.
With borrowers such as HDFC paying higher interest rates, bankers expect lending rates to firm up across the board as the Reserve Bank of India's recent monetary tightening measures begin to bite.
The nation's biggest mortgage lender, which was lent money by banks at base rate, is now contracting lines of credit at 50-75 basis points higher than base rates, said two persons familiar with the matter. HDFC may now be borrowing at 10.5% or 11%.
HDFC provides home loans in the range of 10.15% to 10.40% and if liquidity conditions continue to be tight, it may be forced to raise rates for its borrowers. Its subsidiary, HDFC BankBSE 1.64 %, the most profitable lender, has raised the base lending rate by 20 basis points to 9.80%.
"Several banks signed contracts with HDFC to lend at rates ranging from 10.50% to 11% and on a condition that they cannot repay the loan within 90 days of availing it," said a banker who did not want to be identified. "Since the finance minister does not want banks to raise lending rates, banks have raised the spread on base rate to prevent margins from shrinking."
State-run banks are torn between the need to raise interest rates to protect profit margins amid rising bad loans and the finance minister's desire that they should hold on to lending rates to revive the economy. So, banks are working out ways to circumvent the ministry's orders by charging higher than base rates. Base rate, an average of funding costs, is the rate at which banks cannot lend even to their best customers.
Nothing stops them from charging higher. "HDFC has tied up certain funds through lines of credit as in times like this, it is important to ensure that funds are available when needed," said a company spokesman.
"However, when we draw down the lines, we ensure that the funds are used for assets created on a matching basis with desired spreads. HDFC has a large and strong balance sheet and these amounts are relatively very small. More importantly, we will replace these lines as soon as rates come down as we have the right to do so."
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