Loans to get even cheaper

[karthick]

Loans to get even cheaper

New Delhi: Interest rates on loans — for homes, cars and other kinds of consumer finance — are set to go down another 0.5 percentage points following a decision by the Reserve Bank of India to cut key rates to that extent on Wednesday.

    The RBI announced that the repo rate, effectively the rate at which it lends shortterm funds to banks, and the reverse repo rate — which it gives on funds parked by banks with the central bank — would be cut by 0.5 percentage points with immediate effect. The new repo rate will be 5% and the reverse repo rate 3.5%.

    Banks, both public and private sector, indicated soon after the announcement that they would pass on the benefit of lower rates to their customers in the form of rate cuts on loans. However, they would also cut the interest rates they give on deposits by a corresponding amount.

    UCO Bank CMD SK Goel said, "Banks will soon decide to cut rates, which should help in reviving the economy." A senior official of ICICI Bank also echoed this view. Unlike in the past, when banks have on occasion cut rates for new borrowers without changing the rate paid by existing ones, this time round, old customers on floating rates are also likely to benefit. That is because banks will most probably cut their prime lending rates (PLR), to which the floating rate is benchmarked.

    Home loan rates are at the moment around 10% for most public sector banks, whereas private sector banks are maintaining rates of around 11-12%. SBI has emerged as the most aggressive player with a special scheme, under which new home loan borrowers are being offered an 8% rate. Following Wednesday's announcement, other banks may use the opportunity to come closer to the SBI rate.

    The RBI's announcement, coming on a day when it reiterated its assessment that "there is evidence of further slowing down of economic activity", was clearly aimed at trying to boost demand in the economy by reducing the costs of funds for both consumers and industry.

    Since October 2008, the RBI has cut the repo rate five times reducing it over this period from 9% to 5%. It has also slashed the reverse repo rate thrice, bringing it down from 6% to 3.5%. The cashreserve ratio (CRR), which mandates what proportion of their deposits banks must keep with the RBI in the form of cash, has also been lowered by 4 percentage points. KIND CUTS

    Repo rate, at which RBI lends short-term funds to banks, cut to 5%

    Reverse repo rate, which RBI gives on funds parked by banks with it, cut to 3.5%

    Banks say they'll pass on lower rates to customers in the form of rate cuts on loans

    Banks likely to reduce PLR, which would benefit existing borrowers on floating rate loans, not just new ones

    Since Oct 2008, RBI has cut repo rate 5 times, from 9% to 5% and reverse repo rate thrice, from 6% to 3.5% Govt, the biggest borrower, to get maximum benefit

The RBI's move to cut will reduce to cost of funds for banks.The statutory liquidity ratio — the proportion of their deposits that banks must invest in government securities — has come down by one percentage point over this period. Taken together, these measures have effectively given the banks an additional Rs 4,28,000 crore to lend.

    Recently, RBI governor D Subbarao met bank chairmen to make it clear to them that the central bank was willing to take further measures to infuse liquidity in the system, but only if they did their bit by cutting rates.

    Ironically, the biggest beneficiary of the interest rate cut would be the government itself given the fact that it is not only the biggest borrower, but has also sharply stepped up its borrowing requirements in the current year and the next.

    Against a budget estimate of Rs 1,47,949 crore for government borrowing in 2008-09, the revised estimates are projecting Rs 3,38,780 crore, while the projected borrowings for the next fiscal are Rs 3,43,680 crore. A fall in interest rates at this point, therefore, would mean a major saving for the government.

    On the other hand, the scale of government borrowings is acting as a deterrent for banks to cut rates, since they know that they do not have to seek out or compete for lending options.

source : times of india