INDIA BUSINESS WORLD - JUNE 2006
THE MONTH THAT WAS...

ICICI BANK RAISES LOAN RATES 0.5%

  HOME and personal loans were the first to be impacted by the hike in the benchmark repo rate by RBI.

ICICI Bank, India 's largest private sector bank, was quick to hike its home loan rates by half-a-percentage point. It also raised interest rates on other personal loans, including auto loans, by 0.5%. With the market leader in personal loans hiking rates, other banks are expected to be emboldened to do the same.

Although rates were raised in January-March '06, lenders had not passed on the entire hike to consumers as they had expected rates to soften in '06-07. Bankers say interest rates on other short-term products such as commercial paper are bound to shoot up because of the increase in money market rates. Yields on long-term government bonds have gone up by over 11 basis points, which are likely to be reflected in the yields on corporate bonds as well.

With the central bank making it clear that rates may not soften in the near term, banks are revisiting their lending rates. Idbi Bank's asset-liability management committee will meet to decide whether to increase rates or not.

HDFC Bank and IndusInd Bank have indicated they will take a view on raising interest rates next week. The country's largest mortgage finance provider, HDFC, has, however, said it will not raise rates immediately.

“The rate hike is at the shorter end. The funds we raise are at the medium and longer term. We do not see any immediate need to hike interest rates,” HDFC chairman Deepak Parekh said.

ICICI Bank deputy managing director Chanda Kochchar said the bank had decided not to increase deposit rates. “The repo rate hike was a signal to tell us that interest rates will not come down. What we have done is to pass on the cost of earlier increases in interest rates. An increase in deposit rates would mean an increase in cost of funds.” She added that while there was no pressure on liquidity, demand for credit was expected to be strong.

“I see an increased demand from corporates on account of increased economic activity and their plans. I do not see a slowdown at all,” said Kochchar.