Public sector banks want to pass on the increasing cost of funds to borrowers across the board, but are unwilling to take the plunge right away.

In their efforts to garner larger amount of deposits to try and bridge the shortfall in funding credit demand, the PSBs have already jacked up or are in the process of raising deposit rates by 25-75 basis points.

The PSBs don't want to follow in the footsteps of some private sector counterparts, including ICICI Bank [Get Quote], in simultaneously passing on the increased cost of funds to all borrowers, even though it is denting their net interest margins.

Yogesh Agarwal, managing director of State Bank of India [Get Quote], said, "We have increased interest rates on deposits to raise resources and the RBI has raised the CRR to 5.5 per cent from 5 per cent. As a consequence, margins have come under further pressure."

SBI, the country's largest bank, prefers to tinker only with the interest rates for corporates, which are below its prime lending rate, a strategy adopted by all the other PSBs to try and protect their net interest margins.

"The bank's action to revise lending rates hinges on the RBI's decision to pay or not pay interest on CRR balances. We are waiting for the RBI to come out with a decision," Agarwal said.

The RBI has raised CRR in two stages to 5.5 per cent, effective December 23 and January 6, from 5 per cent now, to contain inflationary pressures and check unbridled credit growth, particularly to certain sectors, such as real estate and capital markets.

SBI's Agarwal said the bank has a "duty towards its shareholders to keep profit margin where it is and, in fact, grow it. SBI may have to take a hit of Rs 160 crore (Rs 1.6 billion) on its bottomline owing to the increase in CRR". SBI's NIM at the end of September 2006 was 3.32 per cent, down from 3.37 per cent at the end of June 2006. Its NIM at the end of March 2006 was 2.92 per cent.

Banks have to change their PLRs in order to pass on the increase in cost of funds to all borrowers, including home loan customers.

Another senior SBI official, not wanting to be quoted, said, "The bank is raising rates on sub-PLR loans. This is happening for loans, which are coming up for renewals and new loans. The extent of the hike is in the range of 25-50 basis points."

The hike in lending rates for sub-PLR loans also factors in the tight liquidity situation in the market. The call rates are ruling over 8 per cent and may remain high for some more time. Even for large corporates with AAA rating, lending rates are close to 9.5 per cent now, a Uco Bank [Get Quote] official said.