State run banks may not have raised their landing rates inspite of pierce in market interest rates, but their marquee customers like HDFC and more indicate that car loan and Home Loan rates may rise.
With the borrowers who pay high interest rates, bankers generally expect lending rates to firm up across RBI's recent economic lessening measures start to bite.
The biggest national collateral lender, who lent money to banks at base rate, is now contracting credit lines at 50 to 75 basis points higher than base rates, said by two persons familiar with this matter. Housing Development Finance Corporation (HDFC) may now borrow money at interest rates of 10.5% to 11%.
HDFC provides home loans at 10.15% to 10.40%, but it may rise the interest rate for the borrowers if liquidity conditions continue to be tight.
In addition to it, HDFC Bank, one of the most profitable lenders, has now raised its base lending rates by 20 basis points to 9.80%
“Many other banks have made a contract with HDFC Bank to lend at rates ranging from 10.50% to 11% and on a situation that they cannot repay the loan amount within the time period of 90 days of availing Loan,” said by a banker.
State run banks are torn to raise interest rates to save profit margins along with the rising bad loans and finance minister want that they should hold on to lending rates to review the economy. So, banks are charging higher than base rates. What actually a base rate is? Well, a base rate is an average of funding costs, at which banks cannot lend even to their best customers.
HDFC has a strong and large balance sheet and the amounts are small. HDFC has tied up certain credit lines, so it is important to ensure that funds are available when needed. Banks are raising base lending rates because their past lending rate indulge is hurting them in the form of high bad loans as the economy slows to it bad in a decade, drawing warnings from the rating firms.
“We think that the bank’s asset quality and earnings may lead to negative rating actions,” said Geeta Chugh.
Even the government –owned banks are at high risk of downgrades because of high sharing of corporate and small enterprise loans. On 15, July RBI gave indications that Indian rupee hit a new low against US dollar. This will keep high interest rates till rupee stabilizes.
“Rates will drop definitely in the future, but not until such time as there is volatility in the exchange rate is contained,” said Duvvuri Subbarao, the Governor.
The central bank’s state that stability in currency is a precondition to roll back the tightening measures may make higher interest rates last a few quarters instead of few days. Shikha Sharma, MD & CEO, Axis bank said,” if it remains like this for a long time, then it will translate into higher rates.” Prolonged tightening would outcome in a rise in cost of funds for banks.
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