The Reserve Bank of India (RBI) has instructed banks to give loans on ‘base rate’ instead of the PLR. The new system will start from April 2010. The base rate will be calculated on a cost-based formula and will be lower than the PLR, although banks will be free to charge a risk spread over the base rate but they cannot lend below the base rate.
However banks have asked for the clarity from RBI on pricing of old home loans once the new ‘base rate’ is adapted as loans given for a longer duration i.e. for 15-20 years, do not have any provision for replacing the prime lending rate (or PLR) – the anchor interest rate to which the floating rates are linked.
Moreover RBI has instructed banks that during the renewal of loans or resetting interest charges, banks should take the ‘base rate’ as the anchor rate. The home loan agreements are like other loan deeds, are legal documents, according to bankers many retail borrowers might resist a switchover from PLR to ‘base rate’ and signing on a new agreement.
Then bankers will also have to struggle with the fact there is no renewal date in case of home loans and existing loan agreements are for the entire tenure of the loan. Also, as the base rate is a floor rate, thus bankers might have to hike the interest rates on some home loans if the base rate of the bank is higher than the existing loan rates.
At least three senior bankers told ET as there is uncertainty on the matter thus they are seeking clarity from RBI on this. “The moot point is the floating rate home loan do not have renewal clause, making it difficult for banks to link these loans to base rate. Alternatively, banks can give customers an option to shift to base rate. But, if customers have availed of loan at rate lower than the base rate, they may resist shifting to base rate. Banks also cannot force base rate on them as it’s a legal document (loan agreement).”
According to bankers the other alternative can be to maintain two parallel rates – PLR and base rate till the maturity of all old loans in their book. But bankers say, RBI might not approve this move.
The RBI main aim is to eliminate the discriminatory prices for old and new customers. At present the old home loan customers are paying higher interest rate in comparison to new home loan borrowers, even though both of them have taken floating rate loans. According to banks they offered new loans at cheaper rate because their incremental cost of funds has come down. But RBI argues that reduction in incremental cost results in reduction of overall cost of funds and thus the benefit of lower rate must be passed to the old home loan borrowers as well. Therefore, if BPLR continues to be anchor rate for old home loans, it might counteract the purpose of introducing base rate.
A senior banker said, “In case of short-term loans given to corporates, individuals and small businessmen, banks may have to keep alive its BPLR. But whether it can be kept active for home loan which has a 15-year maturity is yet not clear.”
The main reason for RBI to introduce the base rate system is to improve the transmission of policy rate to the credit market. Frequently RBI has observed that whenever the policy rates have been reduced banks have not reduced the lending rates by the same quantum. In the policy document of January 2009, RBI governor, D Subbarao pointed out, “While changes in RBI’s policy rates were quickly transmitted to the money and government securities markets, transmission to the credit market was slower. Evidently, the transmission is still in progress.”
Between October 2008 and December 2009, RBI considerably reduced policy rates — the repo rate by 425 basis points and the reverse-repo rate by 275 bps. CRR was also reduced by 400 basis points of NDTL. But the public sector banks reduced BPLR by 125-275 basis points, followed by 100-125 basis points by private banks and 125 basis points by five major foreign banks.
Friday, February 26, 2010
Tuesday, February 9, 2010
Axis Bank leads in withdrawing teaser home loan scheme
After the Reserve Bank of India has hiked cash reserve ratio (CRR) there are chances banks might start withdrawing teaser home loan offers. Axis Bank India’s third- largest private bank has announced to withdraw its teaser home loan scheme two months before the schedule tenure.
Earlier on January 6 bank had launched a fixed-cum-floating rate home loan scheme. Under this scheme bank has been offering 8.25 per cent interest rate for the first two years. Bank charges 3.5 per cent and 3 per cent interest on loan which is less than the mortgage reference rate for loans up to and above Rs 30 lakh, respectively.
A senior bank executive informed that as the CRR has been hiked due to which it would not be possible for bank to offer a fixed rate for two years. But it will continue to offer 8 per cent fixed rate for the first year.
The bank has also removed the product information from its website. This move of bank has surprised many. A direct selling agent had applied for home loan under the scheme said, “With Axis Bank suddenly withdrawing its teaser rate scheme, I am approaching other banks.”
Last year a number of banks launched special teaser home loan schemes led by countries largest, State Bank of India and Axis was one of the last banks to offer such a scheme.
A senior SBI executive has informed that with the hike in CRR the cost pressure is increasing, but bank will fulfill its commitment and continue to offer the product till the end of March.
However under Housing Development Finance Corporation’s the sanction of loans under teaser rate scheme will close on February 13. The disbursement of loans will be completed by March 31. The Axis bank scheme was advantageous as there was no prepayment penalty. According to industry source, “After two years, if the bank’s rates go up sharply, customers can shift to other banks without any penalty.”
On the other hand, other banks are charging around 2 per cent of the outstanding amount as pre-payment penalty. The hike in CRR by 75 basis points done by RBI is expected to absorb around Rs 36,000 crore from the system. Therefore, this along with advance tax outflows in mid-March is likely to reduce liquidity. In view of this in March most of the banks are likely to review their teaser loan schemes.
Earlier on January 6 bank had launched a fixed-cum-floating rate home loan scheme. Under this scheme bank has been offering 8.25 per cent interest rate for the first two years. Bank charges 3.5 per cent and 3 per cent interest on loan which is less than the mortgage reference rate for loans up to and above Rs 30 lakh, respectively.
A senior bank executive informed that as the CRR has been hiked due to which it would not be possible for bank to offer a fixed rate for two years. But it will continue to offer 8 per cent fixed rate for the first year.
The bank has also removed the product information from its website. This move of bank has surprised many. A direct selling agent had applied for home loan under the scheme said, “With Axis Bank suddenly withdrawing its teaser rate scheme, I am approaching other banks.”
Last year a number of banks launched special teaser home loan schemes led by countries largest, State Bank of India and Axis was one of the last banks to offer such a scheme.
A senior SBI executive has informed that with the hike in CRR the cost pressure is increasing, but bank will fulfill its commitment and continue to offer the product till the end of March.
However under Housing Development Finance Corporation’s the sanction of loans under teaser rate scheme will close on February 13. The disbursement of loans will be completed by March 31. The Axis bank scheme was advantageous as there was no prepayment penalty. According to industry source, “After two years, if the bank’s rates go up sharply, customers can shift to other banks without any penalty.”
On the other hand, other banks are charging around 2 per cent of the outstanding amount as pre-payment penalty. The hike in CRR by 75 basis points done by RBI is expected to absorb around Rs 36,000 crore from the system. Therefore, this along with advance tax outflows in mid-March is likely to reduce liquidity. In view of this in March most of the banks are likely to review their teaser loan schemes.
Thursday, February 4, 2010
Canara Bank to double home loan portfolio by Dec, 2010
Canara Bank, Bangalore-based public sector lender has set a target to double its home loan portfolio to around Rs 17,500 crore by December 2010. as of December 2009, bank’s home loan portfolio stood at Rs 8,464 crore, little over 5 per cent of the total advances informed the bank’s executive director K L Jagadish Pai.
During the announcement of bank’s third quarter financial results he told Business Standard, “We had actually set a target to achieve at least 10 per cent of our loan portfolio from home loans by March-end 2010. But, it is not possible in the remaining two months and we intend to disburse another Rs 6,000 crore during the first three quarters of the next financial year-ending December 2010.” Meanwhile for the year-ending March 2010, the bank aims to achieve Rs 1,75,000 crore advances.
He told, however the bank has performed better in home loan sector and was able to achieve 27 per cent growth in the first three quarters of the present fiscal-ended December 2009 against the corresponding period last year. In August 2009 the bank had launched a home loan scheme in which it offered 8 per cent interest rate for the first year and 9 per cent for the second year and 10 per cent for the remaining period of the loan for individual home loan customers. The scheme has been extended up to March 2010.
Pai said, “The real estate sector is reviving and people are coming back for loans. We are the bank with lowest exposure to real estate among our peers. Our exposure to commercial real estate is less than Rs 2,600 crore presently compared to Rs 2,900 crore at the beginning of the fiscal. We are looking at financing more and more Bangalore-based real estate companies so that we will get more individual accounts during this year.”
In view of long gestational period bank is aiming to increase housing loans. He said the sanctions are likely to touch 10 per cent of the asset book of the bank, but the disbursal can be less. He added for the next two months of the present fiscal, the bank is likely to disburse another Rs 500 crore.
He told bank has opened more retail hubs whose number has increased to 37 across Tier-I, Tier-II and Tier-III cities in the country. He said, “We are targeting 10 accounts per day for each retail hub.” Thus the bank aims to target more of individual home loan seekers than the commercial real estate sector. The loan amount of these loans will be around Rs 15-20 lakh.
He added, the bank has not been aggressing in lending to commercial real estate segment in spite of big demand for funds, and said that at present the total exposure will stand around Rs 2,000 crore. He told, “We are not bullish on commercial real estate like many other banks.”
He said the present sanction of loans by the bank stand at close to Rs 30,000 crore, and added part of it will be disbursed over next 18 months.
During the announcement of bank’s third quarter financial results he told Business Standard, “We had actually set a target to achieve at least 10 per cent of our loan portfolio from home loans by March-end 2010. But, it is not possible in the remaining two months and we intend to disburse another Rs 6,000 crore during the first three quarters of the next financial year-ending December 2010.” Meanwhile for the year-ending March 2010, the bank aims to achieve Rs 1,75,000 crore advances.
He told, however the bank has performed better in home loan sector and was able to achieve 27 per cent growth in the first three quarters of the present fiscal-ended December 2009 against the corresponding period last year. In August 2009 the bank had launched a home loan scheme in which it offered 8 per cent interest rate for the first year and 9 per cent for the second year and 10 per cent for the remaining period of the loan for individual home loan customers. The scheme has been extended up to March 2010.
Pai said, “The real estate sector is reviving and people are coming back for loans. We are the bank with lowest exposure to real estate among our peers. Our exposure to commercial real estate is less than Rs 2,600 crore presently compared to Rs 2,900 crore at the beginning of the fiscal. We are looking at financing more and more Bangalore-based real estate companies so that we will get more individual accounts during this year.”
In view of long gestational period bank is aiming to increase housing loans. He said the sanctions are likely to touch 10 per cent of the asset book of the bank, but the disbursal can be less. He added for the next two months of the present fiscal, the bank is likely to disburse another Rs 500 crore.
He told bank has opened more retail hubs whose number has increased to 37 across Tier-I, Tier-II and Tier-III cities in the country. He said, “We are targeting 10 accounts per day for each retail hub.” Thus the bank aims to target more of individual home loan seekers than the commercial real estate sector. The loan amount of these loans will be around Rs 15-20 lakh.
He added, the bank has not been aggressing in lending to commercial real estate segment in spite of big demand for funds, and said that at present the total exposure will stand around Rs 2,000 crore. He told, “We are not bullish on commercial real estate like many other banks.”
He said the present sanction of loans by the bank stand at close to Rs 30,000 crore, and added part of it will be disbursed over next 18 months.
Monday, January 18, 2010
RBI deputy governor express concern over teaser home loan rates
Almost all the banks are offering ‘teaser' home loan rates or the fixed-cum-floating rates which are a major cause for concern.
Ms Usha Thorat, Deputy Governor, Reserve Bank of India said, banks must inform the borrowers about the implications of such rates and during evaluation the repaying capacity of the borrowers is taken into account when the rates become ‘normal’.
Ms Thorat stated it is the responsibility of the each bank to take up the issue at its own level.
Ms Thorat's views are of utmost importance in view of the fact as most of the banks, both public and private, had announced dual rate home loan schemes.
In these schemes the banks have fixed interest rate at a low rate of 8-8.5 per cent for the first few years after which it becomes the prevailing floating rate.
State Bank of India was the first one to launch such a scheme, later on almost all the other banks followed it. Mr O. P. Bhatt, Chairman, State Bank of India stated the bank had launched the special loan scheme due to excess liquidity and no pressure was put on it by the government.
He added at the time of normal floating rate loans also, the interest rate increases after a few years.
He said the 8 per cent loan scheme helped in the growth of SBI's present credit offtake. Mr M.V. Nair, Chairman of the Indian Banks' Association and Chairman and Managing Director, Union Bank of India said, during the sanction of loan bank does an appraisal of the borrowers' repaying capacity and transparency is maintained in the rates, thus there is no issue with regard to dual rate home loan schemes.
Ms Usha Thorat, Deputy Governor, Reserve Bank of India said, banks must inform the borrowers about the implications of such rates and during evaluation the repaying capacity of the borrowers is taken into account when the rates become ‘normal’.
Ms Thorat stated it is the responsibility of the each bank to take up the issue at its own level.
Ms Thorat's views are of utmost importance in view of the fact as most of the banks, both public and private, had announced dual rate home loan schemes.
In these schemes the banks have fixed interest rate at a low rate of 8-8.5 per cent for the first few years after which it becomes the prevailing floating rate.
State Bank of India was the first one to launch such a scheme, later on almost all the other banks followed it. Mr O. P. Bhatt, Chairman, State Bank of India stated the bank had launched the special loan scheme due to excess liquidity and no pressure was put on it by the government.
He added at the time of normal floating rate loans also, the interest rate increases after a few years.
He said the 8 per cent loan scheme helped in the growth of SBI's present credit offtake. Mr M.V. Nair, Chairman of the Indian Banks' Association and Chairman and Managing Director, Union Bank of India said, during the sanction of loan bank does an appraisal of the borrowers' repaying capacity and transparency is maintained in the rates, thus there is no issue with regard to dual rate home loan schemes.
Wednesday, January 6, 2010
SBOP extended home loan till Jan, 31, 2010
The State Bank of Patiala, following the other big players has announced that its home loan scheme has been extended up till January 31, 2010. The bank is offering 8% interest on its home loan scheme. Earlier the home loan scheme was available up to 31 December, 2009.
The bank is offering three schemes- SBP Hi-Five under this it has set interest rate at 8 per cent for a maximum of five years on up to Rs 5 lakhs, and the other schemes are SBP Easy Home Loan and SBP Advantage Home Loan in these schemes the bank is offering interest rate is at fixed rate of 8 per cent for the first year.
Bank will not charge any pre-payment penalty if the customer opts to pre-pay the loan on reset date.
The bank is offering three schemes- SBP Hi-Five under this it has set interest rate at 8 per cent for a maximum of five years on up to Rs 5 lakhs, and the other schemes are SBP Easy Home Loan and SBP Advantage Home Loan in these schemes the bank is offering interest rate is at fixed rate of 8 per cent for the first year.
Bank will not charge any pre-payment penalty if the customer opts to pre-pay the loan on reset date.
Thursday, December 31, 2009
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.
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.
Monday, December 7, 2009
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”.
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”.
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