State Bank of India, India's premier commercial bank has raised its prime lending rate to 12.75% on 26th June, 2008. This is an increment of 50 basis points. The Union Bank of India, another prime Indian bank also followed suit with the same amount of increment in basis point on the same day. As a result UBI's prime lending rate now stands at 13.25%. Industry analysts expect the other Indian commercial banks to follow suit with a similar policy very soon.

It may be noted that the 'prime lending rate' is defined as the rate of interest that commercial banks charge on short-term loans to their large, solvent and credit worthy customers. This prime lending rate is a guideline used by the banks for determining the rates of interest for the other category of borrowers. Prime lending rate is also known as prime rate.

This rise in prime rate is actually indicative of a credit crunch in the economy. In simple terms loans are becoming dearer. However this kind of rate calibrations were expected in view of RBI's recent repo rate raise and CRR hike. This is a time for restrictive monetary policy in the economy in wake of the spiraling double digit inflation figures.

The sectors to be adversely affected by this prime rate hike are mainly housing, consumer durables and auto companies. Market demand will get constricted for most products as loans become costlier.The prime lending rate increase will make the new loans costlier. It will also render all existent floating rate loans dearer. Under this category falls the housing loans, consumer loans and retail loans.The corporate loans will also be costlier.

Punjab National Bank and Bank of Baroda are expected to follow with a prime rate rise before 1st July, 2008. Even small banks are to follow the same policy, affected by RBIs stringent monetary policy. Private sector bank HDFC had already increased their prime rate prior to the RBI announcement. The bank is soon set to further review its rates of interest.Private sector banking giant ICICI is also soon to review its prime rate.IndusInd Bank has already made a 50 basis-point increment in its PLR to 16.25%. It is interesting to note that , industry analysts observe that, as private sector banks are more dependent on overnight borrowing, they will be worst hit by RBIs tight money policy.