Sangita Mehta, ET Bureau Aug 8, 2013, 06.45AM IST | Economic Times

MUMBAI: State-run banks may not have formally raised their base lending rates despite a spike in market interest rates, but are charging even their marquee customers such as Housing Development Finance Corporation (HDFC) more, indicating that cost of home and car loans may rise.

With borrowers such as HDFC paying higher interest rates, bankers expect lending rates to firm up across the board as the Reserve Bank of India’s recent monetary tightening measures begin to bite.

The nation’s biggest mortgage lender, which was lent money by banks at base rate, is now contracting lines of credit at 50-75 basis points higher than base rates, said two persons familiar with the matter. HDFC may now be borrowing at 10.5% or 11%.

HDFC provides home loans in the range of 10.15% to 10.40% and if liquidity conditions continue to be tight, it may be forced to raise rates for its borrowers. Its subsidiary, HDFC Bank, the most profitable lender, has raised the base lending rate by 20 basis points to 9.80%.

“Several banks signed contracts with HDFC to lend at rates ranging from 10.50% to 11% and on a condition that they cannot repay the loan within 90 days of availing it,” said a banker who did not want to be identified. “Since the finance minister does not want banks to raise lending rates, banks have raised the spread on base rate to prevent margins from shrinking.”

State-run banks are torn between the need to raise interest rates to protect profit margins amid rising bad loans and the finance minister’s desire that they should hold on to lending rates to revive the economy. So, banks are working out ways to circumvent the ministry’s orders by charging higher than base rates. Base rate, an average of funding costs, is the rate at which banks cannot lend even to their best customers.

Nothing stops them from charging higher. “HDFC has tied up certain funds through lines of credit as in times like this, it is important to ensure that funds are available when needed,” said a company spokesman.

“However, when we draw down the lines, we ensure that the funds are used for assets created on a matching basis with desired spreads. HDFC has a large and strong balance sheet and these amounts are relatively very small. More importantly, we will replace these lines as soon as rates come down as we have the right to do so.”

Banks are surreptitiously raising lending rates as their past lending binge is hurting them in the form of high bad loans as the economy slows to its worst in a decade, drawing warnings from rating companies.

“We believe banks’ deteriorating asset quality and earnings could lead to negative rating actions,” says Geeta Chugh of Standard & Poor’s. “Government-owned banks are at greater risk of downgrades because they have a high share of corporate and small and medium enterprise loans, and relatively weaker risk management practices.”

There are indications that the July 15 tightening by RBI and subsequent measures could last longer than many investors factored in as the Indian rupee hit a new low against the US dollar on Wednesday. This, some fear, will keep interest rates high since RBI has said it will keep money tight till the rupee stabilises.

“Rates will come down in future, but not until such time as volatility in the exchange rate is contained,” Governor Duvvuri Subbarao said.

The central bank’s stance that currency stability is a precondition to roll back the tightening measures is making some believe the continued slide may make higher interest rates last a few quarters instead of a few days. “If it remains like this for long, it will translate into higher rates,” says Shikha Sharma, MD & CEO, Axis Bank. Prolonged tightening would result in a rise in cost of funds for banks, she said.

Source : http://goo.gl/ItNddt

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