Pvt banks hike rates for home,car loans

06-Mar-2010

HDFC Bank, ICICI Bank and Kotak Mahindra Bank have raised rates on home and auto loans reflecting a stiffening market which could lead to the Reserve Bank of India hastening with a lift in its policy rates from record-lows to fight inflation. These private banks have raised lending rates by as much as 100 basis points (bps), following the hardening of market rates, even as the central bank holds on to low rates to avoid derailing economic growth. A basis point is 0.01 percentage point.

RBI has started slowly rolling back some liquidity boosting measures and has indicated it may not hesitate to raise rates. RBI raised the cash reserve requirements by 75 bps in the last review. "Auto loan rates have been marginally increased by 50 bps," said Pralay Mondal, country head, retail assets & credit cards, HDFC Bank. "The increase in cost of funds is being passed on to the customers. It has been done to protect our margins." Banks are raising lending rates to maintain their profitability, after they hiked deposit rates in the past few months to attract funds that were beginning to flow into higher yielding stocks and real estate. Investors are seeking higher returns instead of safe bank deposits since prices are running far ahead of the rates that banks are offering, leading to negative real returns. With the partial rollback of tax cuts in the Budget, cars, televisions, petrol and travel have become expensive which could fuel inflation further. Food prices are rising at 18%.

Easy money is history

THE first signs of interest rates hardening came from the bond markets where yields on the benchmark 10-year bond have risen 10-12 bps since the Budget. Since the CRR hike, yields have gone up by 40 bps. The yield on the 10-year government securities are close to 8%, up nearly 3 percentage points from their lows last year. Times of easy money are slowly becoming history.

"We had increased the fixed deposit rates by 75 bps in the past couple of months. The increase in lending rates is to align it with the rise in deposit rates," said Kamlesh Rao, head-retail assets, Kotak Mahindra Bank. Axis Bank was the first to discontinue its teaser loan rates in February after the monetary policy. The bank was offering fixed rates of 8.25% for two years. Others who pulled out cheap loans are the government-owned Union Bank and Canara Bank. But bigger ones that are flush with funds - such as the State Bank of India and Punjab National Bank and even Bank of Maharashtra - are continuing with teaser rates, which RBI has warned against. Teaser rate loans are those where interest rates are low in early years, but progressively climb, making it tough for consumers to repay. This is something close to the US subprime loans which caused the latest global credit crisis.

The lending rate increase, which comes just before the financial year ends, is an indication that lenders are bracing for a end-of-the-year tightening in markets. Liquidity is scarce in mid-March when corporates remit their advance taxes to the government. ICICI Bank will now charge 8.75% for loans up to Rs 30 lakh, 9% between Rs 30 lakh and Rs 50 lakh and 9.5% for loans over Rs 50 lakh. It was earlier offering 8.25% for two years. From the third year it would have been floating reference rate minus 3.5%. The bank has also hiked its auto loan rates by 25-50 bps from March 5 thus increasing the rack rates to 9.75-11%.

HDFC has reverted its rate to 8.75% for home loans up to Rs 30 lakh, 9% for loans between Rs 30 lakh and Rs 50 lakh and 9.25% for loans Rs 50 lakh and above. Till last month, it was offering loans at a fixed rate of 8.25% up to March 31, 2012, after which the loan would revert to the prevailing floating rate. Kotak Mahindra Bank has also increased its auto loan rates by 50-100 bps. With this hike, the rates for super premium cars would now be between 9.25% and 9.75%, for premium segment cars it would go up to 10-10.25% while for lower-end cars the rates would be between 10.75% and 11%.

Last month, the bank had discontinued the fixed-rate loan which was introduced in December and also increased its floating rate home loans by 50 bps to 8.5-9%. The rates on personal loans also went up by 50 bps to around 18.5%. Existing customers can breath easy for now. But their outgo may begin to rise soon. "Existing customers will not be impacted for another 40-50 bps hike. We will wait for the April credit policy to take a decision on rates again," said Mr Rao.

Source : www.insuremagic.com