Thursday, June 11, 2009


We often see that every time RBI governor is seen in public addressing any gathering, he never misses an opportunity to state the fact that lending rates have not been lowered by Indian banks as much as RBI would have liked them to do . Despite aggressive lowering of benchmark CRR,Reverse repo rate and repo rate by RBI, the lending rates have not been reduced by the banks to the common man. The reason for this , as bankers argue , is
1. The deposit rates are still high and any fall in lending rates will happen only when the deposit rates come down. This is because banks operate of margin between deposit rates and lending rates and they can not have high deposit rates while reducing the lending rates. Though the deposit rates have indeed come down, and are more likely to come down further, they still are not at 2005-2006 levels.
2. The risk perception among bankers is still quite high. They still are wary of lending at low rates as perceived risk is higher in the broad economy. This is because of the bad global and local economic conditions. This is more of sentiment driven thing than based on pure facts. A 6.7% growth in GDP does not by any stretch of imagination indicate that the economy is in bad shape. However, whatever has happened in the western financial world , indeed has affected the way Indian bankers are going about extending lending.
3. The risk of rising NPAs in future. There is widespread belief among the financial gurus that Indian banking sector will have to face the problem of rising delinquencies going forward and as such banks need to provide for rising potential losses in future. this too , limits their ability to lower rates.
However, with Finance Minister, himself urging the banks to lower rates, there is little doubt now that banks will follow suit. This means that there are good times ahead for the retail customer, farmer,industrialist etc. Lets examine how lowering of interest rates affect the various sections of the society:-
a. Lowering on interest will mean lower EMI on his housing loan. He can save extra on his existing EMI.
b. Lower EMI will help him buy his new home, car , durables etc which he was not able to till now because of the prohibitive interest rates.
c. Lower interest rates will also in all probability bring down the deposit rates. So he wont get as much as he was getting on his FD earlier. This is especially bad news for all retired people who have their retirement fund put in fixed income deposits . With lowering of rates, there monthly income will fall.
d.The extra money saved on your housing loan EMI can be invested in recurring deposits which will acts as a good savings for you over a period of time.
a. Lower interest rates will greatly help the industrialist as lowering of interest generally gives a boost to then overall demand for goods and services in the economy. With lower rates people will have to pay lesser than earlier on their high ticket purchases like home, car etc and will be able to buy more.This will help the bottom line of the companies as well.
b. The increased bottom line and performance will reflect in the stock prices of the company on BSE and NSE. This will further increase their market capitalisation . Increased market capitalisation will result in higher net worth of all the stakeholders in the company.
c. Lower rate facilitates growth in the economy and growing economy attracts foreign investment. This makes capital raising and access to capital easy for corporates.
The above mentioned are just few of the benefits that a lower interest rate regime offers . But, this can not be sustained over a long period of time because a prolonged regime of lower rates increases the liquidity in the economy which results in inflation over a period of time. And inflation starts eating away the purchasing power of the currency and hence the RBI steps in to increase the interest rates again. So, essentially its a cycle. Rates will go up and will come down in a cyclical pattern depending on the various factors governing the economy. As a normal person, we need to ensure that we make all our high ticket purchases when the interest rates are lower because after a point they will go up again. Now is the time when interest rates are headed south. So , one must make good use of this opportunity. Buy your dream home now if you have to else the home loan rates will again start inching back. Home loan rates are already at 8% pa by SBI. They may fall by 50-100 basis points more but no more. Hence , its time for you to go hunting for your dream home on finance.

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