Loans are set to get more expensive. Here's why

HDFC Bank increased its lending rate a.k.a base rate to 9.8 percent from 9.6 percent with effect from August 3, notes a report published in The Times of India, on August 7th.

But do you really need to worry if you are an existing home loan consumer with the bank? After all the loan is actually sold by HDFC Bank, on behalf of HDFC ltd, which has not increased its lending rate. This also means, you are on a Benchmark Prime Lending Rate system, the system followed by Housing Finance Companies (HFCs), unlike banks which follow the base rate system. The answer to that question is yes. The Economic Times today reported state-run banks have not increased their lending rates, but are charging their marquee costumers like HDFC more. And since borrowers like HDFC are paying higher interest rates, interest rates are expected to rise across the spectrum.



If you've taken any other loan from HDFC bank, on floating rate basis, your total cost of the loan just increased.

In fact, just last week Yes Bank was the first bank to revise its base rate. While other banks like Axis Bank, only hiked short term deposit rates, for selective tenures, where in one particular tenure, the new deposit rate was hiked by as much as 400 basis points.

Among other reasons, the cost of funds plays an important role, in determining the lending rates of the bank. And, any rise of cost of deposits, increase the cost of funds and hence, impacts the asset pricing of the bank. Looking at the recent apex bank's measures to tightening the liquidity of the system, interest rates are expected to move northwards, even if it's a gradual move.

Though these liquidity tightening measures from the apex bank side seem temporary, these measures may make the short term interest rates higher, but the long term rates would remain stable, resulting in some temporary pain.

However, there is a good possibility if the margins for banker continue to grow thinner and thinner, the cost of funds will increase and hence the landing rates. Read the whole Times of India report here.

Updated Date: Dec 20, 2014 21:30 PM

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