Rupee woes: Loans to get expensive as ICICI, HDFC bank hike rates

If you had any doubt whether long-term interest rates would rise or not, the bond market proves the reversal of interest rate cycle has already happened.

The benchmark tenure bond yield rose to 9.41 percent today in early trades, crossing its 5-year high yesterday. The rise in yields implies that borrowing costs in the economy is on the rise, which will put upward pressure on loan rates.

According to a report in Times of India _,_the rise in rates would hurt those home loan customers who have gone for the floating rate plan, new auto and other consumer loan customers, besides all large and small corporate borrowers.

Apart from bond yields, there are other indications that long-term interest rates are on an upward trajectory.

ICICI Bank today announced an increase in it’s base rate by 0.25 percent effect from August 23, 2013.The revised rate will be 10.00 percent per annum as against 9.75 percent per aannum at present.Base rate is the rate below which the bank cannot lend. This move will make loans expensive for existing as well as new borrowers.

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On Monday Axis Bank Ltd hiked its base rate by 25 basis points, from 10 percent to 10.25 percent. The new base rate will be effective from 19 August. This move will make loans expensive for existing as well as new loan customers.

Base rate is the rate below which the bank cannot lend.In fact on Friday, public sector Andhra Bank hiked its base rate by 25 bps to 10.25 percent. Earlier this week, Kotak Mahindra Bank raised benchmark lending base rate by 0.25 percent to 10 percent. Earlier this month, the country’s second largest private sector lender HDFC Bank had raised to 9.80 percent from 9.60 percent.

ICICI bank raised it’s domestic deposit rates for select maturities by 50-75 basis points, on Friday. The rate have been hiked in the range of 5-75 basis points. The bank hiked it’s deposit rate by 75 basis points for deposits with 46-60 days tenure.

While the 61-289 days tenure fixed deposit has been hiked by 75 basis points to 7.75 percent. The banks has also hiked it’s five-year deposit rate by 25 basis points to 8.5 percent from 8.25 percent. However, the bank had not changed it’s Benchmark Prime Lending Rate (BPLR) nor it’s base rate.The new rates will be applicable from Monday.

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Public sector bank, Karnataka Bank too raised it deposit rate in the range of 25-50 basis points across the maturity baskets and the new rate will be effective from Monday. Earlier this month Axis Bank, had 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. Canara Bank too hiked interest rate in select maturities, effective today.

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.

However, there is a good possibility if the margins for bankers are under pressure, the cost of funds will increase and hence the landing rates.

On one hand there is reason to cheer especially for senior citizens and pensioners, since FDs will now offer higher rates.On the other hand, existing loan customers will have to bear the pain, as the rise in base rates, make loans costlier.