PNB, Axis Bank hike interest rates, others to follow suit

Taking cue from the Reserve Bank of India’s (RBI) policy pronouncement to make money costly on Tuesday, banks across the public and private sectors started increasing the lending rates on Wednesday.
Punjab National Bank (PNB), second largest government-owned bank, and Jammu &Kashmir Bank on Wednesday increased their prime-lending rates by one percentage point. The new PLR for PNB will be 14%. Private sector bank, Axis Bank, however, increased it by only half a percentage point to 15.75%.
This will make the home, consumer and personal loan costlier by the same amount. In the case of home loans, the EMI of the existing borrowers, who have borrowed at floating rates, would go up to the extent the rates have been increased. One percentage point rise in the interest rate will lead an increase of Rs 70 per Rs one lakh loan for 20 years.
PNB CMD KC Chakrabarty said that the new policy measures announced by RBI on Tuesday gave a clear indication to banks to increase the interest rates so that credit growth could be slowed down. Prior to this, PNB had increased its PLR just one month back effective from July 1.
But, there is a good news for the depositor also as PNB also increased the lending rates across the board on all maturities.
RBI on Tuesday increased the lending rate on short-term fund to banks by half a percentage point to 9%. This has set the benchmark for the interest rates in the market. Besides this, RBI also increased the cash reserve ratio (CRR) —- the requirement that a bank suppose to keep with the central bank —— from 8.75% of total deposits to 9%. This has evacuated around Rs 9,000 crore from the banking system.
As the banks are already facing liquidity tightness, the measure of increasing the CRR has put further pressure on the availability of funds. Therefore, a senior banker said banks are forced to increase the deposits rate to mobilize more resources to meet the demand.
Other banks are likely to follow the suit soon. CMD of another PSU bank said that the increase in the interest rates have become inevitable with the RBI’s new measures. He said that most of the banks will announce the rate hike within a week.
The increase in the interest rate will affect the growth in retail credit. ICICI Bank, which is the largest bank in the retail credit segment, has already said that with the increase in the interest rate, the bank’s retail credit will grow between 5% and 10%. As against this, the credit growth in the market is around 20%.
However, with rate increasing to around 14%, a senior banker said even the corporate houses will postpone their expansion plan. The bankers apprehend that such a steep rate hike will moderate the economic growth considerably.
At the same time, interest rate hike will lead to increase in the default case from the existing borrowers, who had borrowed at floating interest rate. PNB on Wednesday announced a net profit of Rs 512.40 crore for the quarter ended June 30, a 20.6% increase from that in the same period a year ago on the back of improved asset liability management and NPA recovery.