Following the increase in policy rates on Friday, the first in over a year,

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bankers say interest rates for very short- term loans given to companies will rise by between 15 and 25 basis points (one basis point is one-hundredth of one per cent). But banks may wait for the credit policy in April.

O P Bhatt, chairman of State Bank of India (SBI), the country's largest bank, is on record that his bank would not raise lending rates immediately as “we are awash with liquidity”. He, however, also said that “it is a very dynamic situation”, basically suggesting that rates would rise.

All banks are waiting for the Reserve Bank of India’s annual policy statement for 2010-11 on April 20. “We expect RBI to raise rates (again) in the April credit policy. If that happens, then SBI will hike rates,” Bhatt said.

A banking analyst at a foreign brokerage said, “Banks’ cost of funds won’t rise soon, even if policy rates are again increased on April 20. The fall in cost of funds since the easing of policies in 2008 and 2009 has been substantial. SBI alone has retired more than Rs 50,000 crore of high-cost funds in the past one year.” SBI’s cost of funds has fallen by 38 basis points since March last year.

Shyam Srinivasan, consumer banking head of Standard Chartered Bank, said, “The cost of funds will go up with the recent hike in key rates by RBI. However, it will take some time for banks to pass it on to the customer.”

He, however, pointed out that many public sector banks had already signalled hardening of lending rates by deciding not to continue with special interest rate schemes (whereby home and car loans were given at around 8 per cent) launched last year. “We are waiting for greater clarity in the April review of the monetary policy after which a decision on a lending rate hike will be taken,” Srinivasan added. According to him, interest rates will go up in the April-June quarter.

V Srinivasan, executive director of retail banking at Axis Bank, said, “We don’t expect lending rates to go up the before the April policy review. Depending on the credit growth projection, liquidity condition, GDP growth projection and inflation projection in the review, a decision will be taken.”

Banks also have a herd mentality. Each one waits for the other to take the plunge first. The government may also force public sector banks to keep long-term lending rates under check so that higher rates of interest do not hurt the economic revival.

R Gopalan, secretary in the department of financial services, said, “The government will not mandate any rates to banks, except for agricultural loans and lending to small enterprises where an interest subsidy is provided.”

“We have only asked banks to retain a net interest margin of 3 per cent, return on assets of 1 per cent and credit growth of 20 per cent,” added Gopalan.

“The subprime lending rates and short-term rates will rise by between 15 to 25 basis points. SBI still has excess liquidity of Rs 45,000 crore which will cushion us from raising long-term rates,” said a senior SBI official.

ICICI Bank managing director & chief executive officer Chanda Kochhar said the rate hike could impact short-to medium-term lending.

“But again it depends on the demand-supply situation of liquidity. Long-term rates may remain steady for a while,” she said.

Market rates will, however, start reflecting the changed scenario immediately. The rates at which banks borrow from one another for a day (call money) could be the first to feel the heat. “The yields on treasury bills, certificates of deposit issued by banks and commercial paper issued by companies will be impacted the most,” said a senior official of Infrastructure Development Finance Company. The yields on government bonds may also firm up, though the market has somewhat factored in the rate hike.

The subprime lending rates may get realigned.

“Banks will try to protect their margins by cutting discounts offered to large corporate customers. The prime lending rates may be impacted later, as a certain amount of interest rate hardening has already been factored in by banks,” said a senior Canara Bank official.

“The rates at which the central bank lend money to banks and at which the latter park their excess money with the former are the key signalling rates. The increase in these will translate into higher lending rates charged by banks. But this will not happen immediately as banks have a cushion of excess liquidity and the credit growth is still stagnant,” said an IDBI Bank official.