Loans to cost 1% more this year on high prices Rising Demand For Funds, Tight Liquidity May Push Up Rates

BORROWING costs are poised to rise at least 1 percentage point this calendar year as the Reserve Bank of India (RBI) may be forced to tighten rates to contain price rise that is accelerating beyond most policymakers’ forecast.
Bankers and economists believe rates may rise by another 50-100 basis points in 2011 as demand for loans surges in an economy expanding at near 9% and liquidity remains tight reflected in record bank borrowings from RBI.
“Interest rates have not yet peaked,” said S Raman, Chairman & Managing Director at Canara Bank. “Rates may go up if liquidity remains tight and demand for loans increases.”
RBI data show credit grew 23.7%, surpassing the central bank’s target of 20% for the fiscal. Deposit growth slowed at 14.7%, reflecting investors’ preference for higher-yielding assets due to soaring inflation.
On Friday, the country’s largest private bank, ICICI Bank, and largest government-owned bank, State Bank of India, raised lending rates, signalling higher cost of borrowing for individuals, farmers and corporates will continue. SBI raised its base rate—the new tool to price loans for best-rated customers—by 40 basis points to 8% while ICICI raised it to 8.25% from 7.75%. A basis point is 0.01 percentage point. Bank margins may face pressure
MOST other banks have also raised their base rate to 9% in recent weeks. The revised prime lending rates of SBI and ICICI bank stand at 12.75% and 17%, respectively. “Unless inflation comes down, rates will not come down. It will also depend on liquidity situation,” said RP Pradeep, CMD of Corporation Bank. Inflation, after showing temporary signs of cooling for a few months, is rearing its head again. Input costs for manufacturers are soaring and food prices are rising at record pace after unseasonal rains spoiled farm output. Bank margins—the difference between cost of deposits and yield on advances—too are likely to come under pressure in coming months. The margins vary from 3.3% in case of SBI to around 4% forprivate banks such as HDFC Bank.
“So long as there is pressure on liquidity, pressure on margins will continue,” said KR Kamath, CMD of Punjab National Bank. ``Also, there will be resistance among borrowers to absorb a hike in lending rates, but if deposits do not grow in turn with credit growth, banks will need to attract depositors by offering higher rates keeping inflation in mind.” The central bank would stick to its choice of tight liquidity stance to reduce asset price bubbles. “RBI is likely to continue with (its) tight liquidity stand to ensure efficient transmission of monetary policy. However, we do expect liquidity deficit level to come off to Rs 50,000-60,000 crore once demand and supply gap normalises,” said Hemant Mishr, head of global markets, Standard Chartered Bank.

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