Cos to feel the pinch

Corporates will soon see an increase in their interest costs with banks on course to hike lending rates after the quarter percent repo rate hike by Reserve Bank of India.

“Banks will charge higher interest rate to corporates over a period of time for shorter tenure loans,” Neeraj Swaroop, CEO India, Standard Chartered, said. Among public sector banks, Bank of Baroda is likely to increase its corporate lending rate soon. “Our PLR at 11% is among the lowest. We want to realign our rates both in corporate and retail to maintain our margins. Our board will meet on July 28 to take a final decision,” said the bank’s CMD, AK Khandelwal.

Most banks were reconciled to Tuesday’s rate hike. In the last few months, some banks had factored in a hike in interest rates while pricing their loan products. In the quarter ended June ’06, credit rose 32%, and bankers are expecting the growth to continue despite the latest rate hike.

According to Shailendra Bhandari, MD and CEO, Centurion Bank of Punjab, lending rates may inch up, not only because the RBI clearly desire a cooling-off in bank credit growth, but also the effective cost of funds has increased for banks over the last few months due to a combination of measures undertaken by the RBI.

“Those waiting for a signal will use this as an opportunity to raise rates. However, the hike will remove uncertainty from G-sec markets as rates are expected to be stable for this quarter,” said Ajay Mahajan, country head, financial markets, Yes Bank. Atul Sodhi, head, corporate banking, Calyon Bank, felt that the RBI rate hike will signal the end of the low interest rate regime.

“Interest rates in the shorter term will surely move up by around 25-50 bps, while the longer term impact is dependant on other factors that will emerge over a period of time. The credit offtake is partly fuelled by both organic and inorganic growth strategies undertaken by Indian corporates,” he said.

According to Nageswara Rao, CEO, commercial banking, IDBI Bank, “Interest rates had been on an upward trajectory over the last few months. Despite this, the credit demand has not been adversely impacted and, in fact, credit growth in the past quarter has been the highest over the last five years.”