Low interest rates in 2009, best in many years for borrowers

Amongst all those bad news of global economic crisis, recession, high inflation, etc., the year 2009 was the best in many years for borrowers as interest rates had come down.

This year the car and home loan rates had come down to as low as 8 per cent, the lowest in six years brought cheers to borrowers.

The country's largest lender State Bank of India launched its special home loan scheme in February, under it offered loans at eight per cent and by the end of the year many other big players like HDFC and ICICI Bank followed the suit.

In all this the borrower made merry.

Some of the banks reduced the car loan rates to 8% from as high as 14%. But the investors suffered a rude shock when banks started reducing deposit rates in a phased manner by 400-600 basis points, and the banks continued reducing rates till November.

However Reserve Bank (RBI) kept its policy rates to low level in order to boost the economy.

The rate at which banks borrow from RBI in exchange of government bonds is known as repo rate was low at 4.75 per cent, reverse-repo at which the apex bank accepts deposits from banks at 3.25 per cent and Cash Reserve Ratio, the portion of cash banks invest with the Reserve Bank, at 5 per cent.

Bank of Baroda chairman and managing director M D Mallya said, "The year 2009 was quite eventful for banks and it showed the resilience of the system to a huge crisis in related markets."

"As we move ahead, when we shun the impact of slowdown, I expect the bank credit growth to revive considerably, which may result in upward movement of lending rates as well."

On the other hand the central bank is under pressure to tighten monetary stance due to increasing inflation, up till now it has been dovish.

The bankers say if RBI increases cash reserve ratio, it can help in clearing up the excess liquidity, after this RBI can start raising repo rate and reverse repo rate to come out of the easy money regime.

Currently, there is surplus liquidity in the system. RBI can start the process of mopping up liquidity by hiking CRR by around 25-50 basis points in January, Jammu & Kashmir Bank chairman Haseeb Drabu said.

This measure taken by RBI will automatically indicate to hike in interest rates in the system.

Also, the discussion on the consolidation in the public sector banks started this year as Finance Ministry held meetings with leading PSU banks to explore the possibility of creating a few large banks by merging and acquiring small banks.

In November Additional Secretary G C Chaturvedi called a meeting which was attended by the heads of five major PSU banks - Punjab National Bank, Bank of Baroda, Canara Bank, Union Bank of India and Bank of India.

According to bankers in 2010 the consolidation talks in the Indian banking system will gain momentum, both in public and private sectors, as it the competition in the global banking space is going to increase.

RBI in order to strengthen the banking system has proposed to increase provision coverage for the banks which should not be less than 70 per cent by September 2010. Increase in provision coverage can lower profits (mainly for SBI and ICICI Bank) in the next three-four quarters, an analyst said.

The Reserve Bank panel has suggested ensuring transparency, banks should offer interest rates on loans linked to a defined minimum base rate instead of the present benchmark prime lending rate (BPLR).

The RBI stated linking lending rates to base rate will raise concerns relating to growing sub-BPLR portfolio of banks.

Thus as per this proposal all the banks will have to declare a base rate and fix interest rates over that depending upon the credit profile of the borrower and repayment period.

State Bank of Mysore has extended two home loan schemes till March 31

Following the suit of big players State Bank of Mysore has also extended its two home loan schemes till March 31, 2010. Currently bank is offering fixed rate of 8% for the first year under its two schemes - “Easy Home Loan” and “Advantage Home Loan”.

However, from this month bank will be charging processing fee, a source in the bank’s personal and services banking department said. The scheme was set to expire on November 30.

The sources said, “All other banks have extended their schemes and we have also extended our festival offer. We are witnessing steady demand for home loans as buyers are now looking at investing their funds in buying property”.

Borrowers get best rate option on home loans

On Tuesday HDFC announced its offer of dual-rate on home loan, thus the aspiring home buyers are getting good options.

Before the State Bank of India (SBI) offer of 8 per cent on home loan was termed as ‘a gimmick’ by the Housing Development Finance Corporation (HDFC) has entered the dual-rate bandwagon with its ‘festive’ offer of 8.25 per cent for home buyers.

The HDFC bank loan offer will be valid till January 31, 2010, is expected to offer more options to the potential home buyers. Besides HDFC, there are number of players offering attractive home loan rates.

According to the figures, Bank of Rajasthan (BoR) is offering the lowest rate of 7.5% per annum which is 50 basis points less than the SBI offer. The Development Credit Bank is giving offer of 7.95% for the first year. The other players are such as Axis Bank Power Plus, State Bank of Bikaner and Jaipur and Canara Bank are offering 8 per cent rate for the first year.

According to industry experts for home buyers the first year rate should not be most important factor because the normally the home loan tenure is of 15 to 20 years. Therefore, if the low rate is offered in the first few years and later on increases, the home buyers will find themselves under serious financial problem.

SBI is offering 8 per cent for the first year and 8.5 per cent for the second and third year subsequently the rate will be 2.75 per cent less than its benchmark rate or the State Bank Advance Rate from the fourth year onwards.

On the other hand HDFC’s dual-rate offer is equivalent at 8.25 per cent till March 2012, after that at loan will be offered at floating rate which will be 500 basis points below their benchmark.

Suppose you choose to take loan of Rs 25 lakh for 20 years from BoR, the EMI (equated monthly installment) for the first year will amount to Rs 20,140. While for a similar loan amount from SBI and HDFC the first year monthly EMI will amount to Rs 20,911 and Rs 21,302, respectively.

Thus by taking loan from BoR you will save around Rs 771 per month (Rs 9,252 a year) and Rs 1,162 per month (Rs 13,944 a year) for SBI and HDFC, respectively. The figures are not quite significant as the home loan is for a long tenure. Moreover in the second and third year, HDFC (till March 2012) will charge 8.25 per cent, while BoR and SBI are offering 8.5 per cent for the same.

Hence before taking the final decision on best rate, one has to look at the costs such as processing fee. BoR charge 0.5 per cent to 1 per cent processing fee of the loan amount whereas, HDFC charge 0.5 per cent and SBI nil.

While a person takes a loan of Rs 25-lakh, then the processing fee charge by the BoR will amount to Rs 12,500 to Rs 25,000. However on loan taken from HDFC the fee will be Rs 12,500, and for SBI, the cost is zero. Thus the person will not save anything in the first year if the loan is taken from BoR due to higher costs.

Subsequently from the fourth year, the applicable floating rate of the bank’s existing cost of funds and the benchmark rate will be charged. Although it is not easy to predict the future rate of interest but to get some idea about the EMI one can use current benchmark rates and calculate the average rate of interest per year.

After the calculation the figures will be something like this. BoR is offering the best rate at 8.53 per cent, followed by HDFC and Axis Bank at 8.63 and 8.65 per cent, respectively. At 8.76 per cent, SBI’s rate comes fourth.

Therefore the potential home buyers get a lot of options. At present they can pay low EMIs and pay higher when their incomes improve after three years.

Moreover it also provides good option for the borrowers who want to shift their high-cost on the existing loans to cheaper options. Most of the existing borrowers are paying excess of 10 per cent on their loans, so for them it is the right to shift. But they have to work out the cost of shifting as it involves a prepayment penalty.