Commercial banks have started raising their lending rates even as the market is punting on a reverse repo rate hike by the Reserve Bank of India [Get Quote] in its mid-year review of the annual Credit Policy on Tuesday.

Some senior bankers, contacted by the Business Standard, made it clear that the lending rates would go up even if the RBI refrained from hiking the short-term policy rate, which means home loans, personal loans, car loans, etc will now be more expensive.

The reverse repo rate (the rate at which banks park their excess liquidity with the RBI) is now pegged at 5 per cent, half a percentage point more than what it was a year ago. The bank rate is at a three-decade low 6 per cent. The repo rate (the rate at which the RBI infuses liquidity into the system) is also 6 per cent now.

"We have told all our corporate clients that they will need to pay half a percentage point more for all loans above three years. One cannot afford to give medium-term loans at 7 per cent or lower than that. We will charge them a minimum of 7.5 per cent," said the chairman of a large Mumbai-based public sector bank.

Essentially, banks are raising their lending rates without tinkering with their prime lending rates. The PLRs of most banks are around 11 per cent but an overwhelming majority of corporate borrowers are accessing loans at much below the PLR.

"We are still lending at sub-PLR but the gap between the PLR and the rate at which we are lending is shrinking," said the CEO of a bank.

Banks are offering about 6.25 per cent interest on five-year deposits. Bulk deposits attract even a higher rate. "Unless we pay more, we cannot get deposits as money is flowing into the stock markets," added the banker. "Despite the increase in the volume, banks' profitability has not gone up as they are under-pricing loans."

"The loan market is growing and, hence, there is no logic in under-cutting each other," said the PSU bank official.