Loans get more expensive for corporate and retail borrowers as ICICI and HDFC Bank increase benchmark prime lending rate (BPLR).

This is the third time the lending rates have been increased since July 2010. July was the month in which the Reserve Bank of India (RBI) had introduced the concept of base rate-a new benchmark that is related to the cost of funds for banks. In fact experts and banks believe that the rates are going to rise further. The increase in rates would affect the new as well as the old borrowers. But it is believed that old car loan borrowers would not be affected as these loans are generally processed at a fixed rate.

HDFC Bank:

• HDFC has revised its base rate by 45 basis points to 8.2%.
• No change in deposit rates.

ICICI Bank:

• ICICI Bank increased its base rate by 50 basis points (0.5%) with effect from February 24.
• The revised rate will be 8.75% as against 8.25% at present.
• The bank also increased return on its deposits by 25 to 50 basis points.

ICICI home loans become more expensive than SBI and HDFC home loans. ICICI Home loans will now cost 9.75% for borrowings up to Rs 30 lakh and 10.25% for larger borrowings. For a borrower with a 20-year loan, a 50-basis point increase in the lending rate would roughly translate into an increase of Rs 33 in EMI for Rs 1 lakh.

ICICI Bank has also announced an increase of 0.50% in its BPLR and in its floating reference rate (FRR) for consumer loans (including home loans). These rates are used for determining interest rates on loans and advances sanctioned up to 30^th June 2010.

Why are the rates rising? The cost of funds for banks is set to increase with banks consistently paying high interest rates in the overnight money markets for short-term funds. Interest rates in the overnight market have been over 6.75% for several days as several banks did not have the government bonds as collateral to borrow from RBI.

Unlike the earlier benchmark-the prime lending rate-the base rate is also the floor rate for bank lending. According to RBI rule banks have to review the base rate at least once every 3 months. Since the base rate is the base formula for all lending rate, any change in base rate will be passed on to borrowers.

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