While saying that they expected softening of rates after March, Chanda Kocchar, Joint Manging Director of ICICI Bank says the bank has decided to increase the rates by 50 bps across all its lending products. It is for both corporate and retail lending.
She clarifies that the increase in the income levels of retail customer and the increase in the economic activity for the corporate customer are both really leading to fundamental increase in demand. "So we don't really expect much impact on the demand for funds because of this increase in interest rate," she says.
Excerpts from CNBC - TV18's exclusive interview with Chanda Kocchar:
On interest rates
We saw the signal coming out of the rate increase yesterday. Normally after March, banks expect interest rates to go down after the year-end pressure is over. But this year we didn't see interest rates going down after March. In fact yesterday we saw this clear signal that interest rates are going to continue to remain high.
Therefore, this was something we have to incorporate in all our pricing decisions. It is really a correction of all the increases and cost of funds that took place from February, March onwards. We have decided to increase the rates by 50 bps across all our lending products. It is for both corporate and retail lending.
On rate hike impact on rising demand for funds
All the economic growth in the economy is really driving the demand for fund whether it is on the corporate side or on the retail side. The increase in the income levels of retail customer and the increase in the economic activity for the corporate customer are both really leading to fundamental increase in demand. So we don't really expect much impact on the demand for funds because of this increase in interest rate.
On passing the burden on to the customer
What we are looking at is a last 3-4 month phenomenon. During the last quarter of the last year, January-March, interest rates have gone up. Clearly we hadn't passed the entire increase because we had expected interest rates to come down after March.
So it is not as if in the last one day the cost of funds have gone up, but going by the signal, one doesn't expect the cost to come down now, therefore one has taken this decision.
On income levels and home loans
We have seen the home loan market grow upwards of 35% per annum. This growth is really coming from the fact that income levels have gone up. So the real estate prices have gone up while the interest rates have gone up. Still, if we look at the affordability of homes versus the income levels of a person, it has improved substantially compared to what it was five years ago.
Income levels of people are going up, the service sector industry is doing well, and people are being able to afford homes and that is from where the increase in demand is really coming from.
On coming down of real estate prices
If you have noticed, the real estate prices in some locations have more or less stabilized. I really don't see any reason for the prices to really come down because this is all demand-driven and the demand is really coming out of fundamental factors.
On decision to hike rates
As banker, I have seen it year-on-year that interest rates do go up between January and March. After March there is some amount of softening that happens on interest rates and therefore the pricing decisions that we took between January and March. We expected some amount of softening to happen after March.
The difference in expectation is to the extent that the softening did not happen this year after March and in fact the signal that we saw yesterday was a clear signal to say that softening is not likely to happen. That is what made us look back at our own pricing decision and say that now we have a clear signal.
We need not expect a softening in our cost that we had build in as we normally see every year and therefore we need to pass on whatever was the balance increase in cost of funds to the customer.
On hike in deposit rates
We will wait and watch about the deposit rates as I said the lending rate increase is more a correction of the past cost of funds. We have not yet taken any decision on the deposit rate front as yet.
On markets being sensitive to rate hikes
I believe all these markets on the retail side, whether it is auto or home, the growth is not coming because the interest rates had gone substantially down and because there was a lot of speculative activity.
The entire growth has come because of fundamental factors, because of affordability, which is driven by increase in income levels. So I think that factor continues to stay. So the economic activity growth is really leading to income growth of the Indian consumer and therefore the affordability of the Indian consumer. That is a very fundamental factor and therefore we would not see any impact.
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