Lending rates have finally started rising with the start from sub prime lending category.

Banks generally lend to credit worthy customers at rates much lower than the Benchmark Prime Lending Rate (BPLR). These rates are terned as sub BPLR rates or sub prime rates. The sub prime customers mainly consist of wealthy corporates and high net worth individuals.

Corporation Bank has started repricing of its short term loans since 1st April 2010. "Now our short-term sub-PLR is in the 6-6.5% range," said J M Garg, chairman and managing director of Corporation Bank.

The bank earlier used to offer loans at rates as low as 3.75 - 4% which is much lower than the BPLR of 12%.

"As interest rates are going up, the tendency to give loans at cheaper rates cannot be sustained," said M Narendra, executive director, Bank of India.

There have been two major reasons that can be attributed to banks changing their short term lending strategy. First, the policy tightening measures in the form of hike in key rates by RBI.

Second factor is the interest calculation on daily basis for savings account as mandated by RBI from 1st April 2010. This has raised the cost of funds of banks by 10-20 basis points.

"Over period of one year, lending rates may go up by 50 basis points," said Abizer Diwanji, head (financial services), KPMG. The first 25 basis points hike may take place in this quarter itself while lending rates may go up by another 25 basis points in the rest of the year, he said.

"Recently we have raised short-term loans from banks at 4.93%. If rates go up further, we will shift to CP," said H D Khunteta, director of finance, Rural Electrification Corporation.