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.