Lending, deposit rates to go up ahead of festive season: SBI

Soon after unveiling of the Reserve Bank's mid-quarter policy review, country's largest lender SBI today said lending and deposit rates will go up in view of the festive season demand.

"Now the busy season has started so there is a huge credit demand and banks are scrambling for deposits. Deposit rate, I think, will go up and accordingly to that lending rates can also go up," SBI chairman Pratip Chaudhuri said here.

Banks would first raise the deposit rates and then they will calibrate the lending rate, he added.

Yesterday, SBI increased its base rate by 0.1 per cent to 9.80 per cent, becoming the first major state-run bank to hike lending rates after short-term rates rose as a result of RBI's liquidity tightening moves announced in July.

SBI also increased the spreads on auto and home loans by as much as 0.20 per cent, which will affect new borrowers.

Home and auto loan borrowers typically pay a margin, or a spread, above the base rate, which is arrived at as per the risk and quantum of borrowing.

Noting that the base rate or the minimum lending rate is not a function of policy rate, Mr. Chaudhuri said it is a function of bank's liquidity position and ability to meet the deposit and lending situation.

On the deposits front, SBI increased its offering for products maturing in 7 days, 179 days, 211 days and less than a year by one percentage point to 7.50 per cent each.

Commenting on the policy review, Canara Bank executive director A K Gupta said: "There will not be much impact on the interest rate immediately."

The RBI has done a balancing act. Much of the borrowings by banks are from the MSF window and reduction of 0.75 per cent will lower the cost of fund, Mr. Gupta said.

"We feel that short term money market rates and deposit rates will come down immediately and act as a great relief to banks to certain extent," said M Narendra, chairman and managing director of Indian Overseas Bank.

The start of a busy season will increase the demand for credit and if the liquidity dries up from the present levels driving up the cost of their resources again, banks may have to consider revisiting their lending rates after September 2013, he said.

Terming the review as well balanced policy, ICICI Bank managing director Chanda Kochhar said the RBI has taken decision considering various developments across the globe and their near term impact, as well as the structural imperatives for India.

The policy signals the return to the repo rate as the key policy tool as well as RBI's intention to cautiously unwind the exceptional measures and place greater emphasis on the long term growth-inflation dynamics, she said.

"This should be viewed as positive for the long-term economic environment as well near term stability in financial markets," she added.