Home loan rates are set to rise for existing borrowers of State Bank of India (SBI) and ICICI Bank, with both lenders increasing their prime lending rates (PLRs) by 50 basis points. SBI, besides raising lending rates, has also increased returns on term deposits and has introduced a floating rate deposit scheme to attract investors in a rising rate regime.

The cascading impact of RBI’s hike in repo and reverse repo rates is being felt earlier-than-expected with the central bank keeping liquidity on a tight leash. On Monday, 15 banks borrowed `25,550 crore from RBI paying 5.75% for overnight money. With credit picking up, banks are back to paying returns of as much as 7% on short-term certificate of deposits (CDs). During the last fortnight, several banks such as Punjab National Bank, IDBI Bank, Union Bank of India and Bank of Baroda raised their PLRs by 50 to 75 bps. This is largely because even as banks are pricing new loans at base rate, over 90% of loans are still linked to PLR.

For SBI, this is the first lending rate hike after the RBI began raising policy rates since February this year. SBI has not revised its base rate – the new cost-plus pricing mechanism effective from July 1, which continues to stand at 7.50%.

ICICI Bank has said that besides increasing its PLR from 15.75% to 16.25%, the private lender will also increase its floating reference rate (FRR) for consumer loans (including home loans) by 50 bps.

Although the new benchmark base rate was introduced to ensure that new and old borrowers get a uniform treatment, difference persists. Banks have found that they cannot on their own migrate borrowers whose loans are linked to the PLR to the new benchmark. RBI has indicated to banks that loan agreements are legal contracts and cannot be altered at will.

SBI will offer floating rate deposits where interest rates on deposits of one year, three and five years will be linked SBI’s base rate (7.50%). At the same time, the bank will continue to offer fix rate deposits on various maturity. These deposits come at a time when RBI has warned of further rate hikes and there is a general expectations that deposit rates will continue to rise.

On one-year floating rate deposits, SBI will offer 50 bps lower than base rate, which works out to 7%, for three years, it will offer 25 bps lower than base rate which is 7.25% and for five year, the rate will be the applicable base rate, which is 7.5%. SBI also raised its deposits rates on fixed deposits. The interest rate on one-year fixed deposits stands at 6.75%, for three years at 7.25% and for five years at 7.50%. By introducing floating rate deposits, SBI hopes to retain depositors who otherwise may have shifted their deposits in higher yielding products like mutual funds.

Past efforts by banks to introduce floating rate deposit schemes have failed because these schemes were launched when interest rates were falling. SBI’s move to offer floating rate when rates are headed north is a different proposition altogether. The floating rate deposits will come into effect from September 6.

Incidentally, the SBI move to raise its PLR comes a day after FM said that he was confident that banks would not raise lending rates. FM made this statement to media after meeting chiefs of PSU banks on Saturday. SBI officials say that the lender has raised lending rate for the first time after RBI raised key policy rates – cash reserve ratio and repo rate by 100 bps and reverse repo by 125 bps in different phases.

On the deposits side, the bank has raised rates by 25 to 150 bps across maturities and introduced special rates for 555 days and 1,000 days. A steep hike of 150 bps is made in the slab 15-45 days where rates have been raised from 2.50% to 4%. The bank will offer 6.75% for 555 days and 7.25% for 1,000-day deposits.

While HDFC has not hiked rates yet, but it has restructured some of the deposit slabs after the RBI’s rate hike. “It is not that we will hike rates tomorrow, but we do keep reviewing our loan rates based on the cost of funds and, in the next review, we will take into account any increase in cost of funds,” said Keki Mistry, vice-chairman and CEO of HDFC. He added that for HDFC, the cost of wholesale funds was more important than cost of deposits. He further added that the special dual rate scheme will continue till end-August.

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