Costly proposition

Mumbai, Dec. 13: Just four days after the Reserve Bank of India (RBI) hiked the cash reserve ratio (CRR), ICICI Bank today announced that it would raise interest rates on floating rate home loans and corporate advances by half a percentage point.

The country’s largest private sector bank is also raising interest rates on domestic term deposits by 25 to 50 basis points across various tenors.

ICICI Bank’s move is likely to spur others to raise their lending rates as well. Observers expect entities like Housing Development Finance Corporation (HDFC) to soon hike rates.

Most of the public sector banks, who have so far indicated that they are not planning to revise the interest rate structure, may also follow suit by raising home loan rates and sub-PLR loans (disbursed to corporate borrowers) over the next few weeks.

It is felt that these banks, which include the State Bank of India (SBI), may up home loans by 25 to 50 basis points. It was only last week that SBI increased interest rates on domestic term deposits by 25 to 75 basis points.

In a press statement issued late in the evening, ICICI Bank said there would be an increase of half a percentage point each in its benchmark advance rate (I-BAR) that is used for corporate loans and its floating reference rate (FRR), meant for all consumer loans, including home loans. While the revised I-BAR will be 13.75 per cent, the revised FRR will be 10.75 per cent against 10.25 per cent at present.

For existing floating rate customers, the increase in FRR by 50 basis points will be effective from January 1, 2007. ICICI Bank, however, added that existing fixed rate customers, whose loans are fully disbursed, would not be impacted by the increase and their contracted rates would be unchanged.

ICICI Bank also announced an increase in interest rates on deposits of value less than Rs 1 crore in the range of 25 to 75 basis points across various tenors with effect from December 18.

Sources from the bank said the rise in lending rates was a consequence of last Friday’s action by the central bank to raise CRR by 50 basis points to 5.50 per cent. CRR is that portion of a bank’s deposits which must be maintained with the RBI. “ICICI Bank raises interest rates when cost of funds go up. As far as deposits are concerned, they have been hardening over the past few months,” they said while explaining the reason for the hike.