Get ready to pay more: Banks hike prime lending rates

It may be recalled that on Tuesday, the Reserve Bank of India (RBI) hiked the repo rate, or the key lending rate at which the central bank lends funds to commercial banks, from 8.5 percent to 9 percent, and the cash reserve ratio (CRR) or the proportion of reserves the commercial banks must keep with the central bank, from 8.75 percent to 9 percent to tame inflation.

Though RBI acted with an aim to moderate inflationary pressures, yet, the move is going to hit hard India's economic growth as with banks increasing their prime lending rates (PLRs), credit demand would fall, leading to decline in demand and business investments.

Already, India's two largest private banks, ICICI Bank and HDFC Bank have hiked their PLRs by 75 basis points or 0.75 percent.

India's largest mortgage lender Housing Development Finance Corporation (HDFC) also said it has raised its retail prime lending rates (RPLR) by 75 basis points or 0.75 percent. The increase will take effect from August 1 and its floating home loan rates will carry a minimum rate of 11.75 percent.

Axis Bank and Yes Bank have hiked their PLRs by 0.50 percent each while state-run Punjab National Bank increased its PLR by 1 percent.

Jammu & Kashmir Bank and IDBI Bank have also raised their PLRs by 0.50 percent each.

Bank of Rajasthan said it is increasing its BPLR (benchmark prime lending rate) by 1 percent and RPLR by 0.50 percent

Bank of India (BOI) chairman and managing director T.S. Narayanasami said he expects the bank to increase its PLR by "minimum 50 basis points." This, however, would come into effect after August 30 when RBI's new rates take effect, he said.

Other banks like state-run Bank of Baroda and Dena Bank said they would take a decision on lending rates later this week.

According to Seshadri Sen, banking analyst at Macquarie in Mumbai, RBI's move "is negative for banks, especially as the hikes were above consensus expectations."

"We expect lending and deposit rates to rise further and growth to slow significantly. This will affect banks' net interest margins, loan growth and credit losses," Sen said.

"The central bank is saying they want to control inflation and do not mind if growth comes down, which indicates that banks will be inclined to increase interest rates. If the interest rates go up, the sectors which are going to be affected immediately are the housing sector, retail, automobiles, and all those who are directly connected with the retail business," said Y.M. Deosthalee, CFO, Larsen & Toubro.

Agrees Venu Srinivasan, chairman and managing director, TVS Motor. "Money supply will be squeezed and consumers will have less money in their hands to spend," he said.