Home loan EMIs set to jump as banks hike rates

NEW DELHI: With most banks set to increase lending and deposit rates, it's time to rework your monthly budget.

A day after housing finance firm HDFC set the ball rolling by announcing a 50-75 basis points increase in lending rates, ICICI Bank -- the country's second largest lender -- hiked its lending and deposit rates.

Effective Monday, the private sector lender will increase its benchmark prime lending rate, which also affects floating rate home loans taken before July, by 50 basis points (one basis point is one-hundredth of a percentage point). Deposits with ICICI Bank will now earn 25-50 basis points more.

For home loans, the increase in lending rates roughly translates to the equated monthly instalment (EMI) going up by around Rs 50 per lakh. So, for someone who has borrowed Rs 30 lakh for 20 years, a 50 basis-point increase will push up his EMI by around Rs 1,500.

A shift to another bank is not an option because most of them look set to follow the trend.

On Monday, State Bank of India -- the country's largest lender -- will take a call on hiking rates. Axis Bank, another private sector lender, too, is expected to review its rates next week.

An increase in rates appears to be a certainty, it is the extent of the hike that most banks have to decide on.

Of course, those on teaser rate schemes will see their EMIs protected for the tenure that interest rates were fixed. Even ICICI Bank's increase is not going to affect the fixed rate borrowers.

The higher EMI burden is the result of a series of hikes in policy rates announced by the Reserve Bank of India this year as part of its efforts to tame inflation. As a result, the cost of funds for banks has gone up -- both in the deposit market as well as in the money market.

What has added to the pressure is the low availability of cash in the system. With growth in bank deposits unable to keep pace with the rise in flow of loans, liquidity has stayed tight prompting banks to tap RBI for funds. In the coming weeks, liquidity crunch can intensify. Quarterly advance tax payments for large taxpayers is due by December 15, and this, along with quarter-end demand for loans, will put further pressure on banks.
"If the liquidity situation remains the way it is, probably we will have to take a call on it (interest rates)," said Axis Bank Managing Director and CEO Shikha Sharma.

A senior SBI executive said, the bank is reviewing interest rates and its asset-liability committee will take the final decision on Monday.
"We will decide at an appropriate time. It is a dynamic market and we need to keep reviewing it," added KR Kamath, chairman and MD of Punjab National Bank.

A handful of players, such as Union Bank of India, however, said having recently increased lending and deposit rates, they would prefer to wait for a while.

But most bankers were unanimous that in the coming days, deposits will have to be incentivised by way of higher rates. And, a higher cost of deposits for banks automatically translates into higher lending rates.