Loan interest rates in a downward trend?!

RBI’s decision to slash the SLR rate by 100 basis points to 23 percent has pleasantly surprised many.  Banks had witnessed tight liquidity position in last few months, but the current move by RBI would ease the pressure, to some extent.  The effect of RBI’s step has been taken immediately by the State Bank of India (SBI) on a positive note as it has announced a cut in the home loan and car loan interest rates with effect from August 7, 2012. Home loan interest has been cut to 10.25% from existing 10.5% for the loan amounts below Rs 30 Lakhs, whereas the loan amount between Rs 30 Lakhs to Rs 75 Lakhs will now attract an interest rate at the rate of 10.4%. The maximum cut of 85 basis points has been announced on the loan amount above Rs 75 Lakhs. Auto loan interest rate has been reduced to 10.75% from the previous rate of 11.25%. The banking sector is expected to follow the trend with increased liquidity in the days to come. The base rate is standing unchanged at 10 percent at the moment, so existing bank borrowers would not get the benefit of any rate reduction.

In the term-deposit front, SBI has announced a cut in the term deposit rate for five years (up to ten years) by 25 basis points to 8.5% with effect from August 7th, 2012. Contrary to the move of the largest bank, the second-largest bank of India i.e. Punjab National Bank (PNB) has announced an increase in term deposit rate from 8.75 percent to 9 percent for a one-year tenure single deposit of Rs One crore or fewer amounts. It has also increased the NRE deposit rate to 9 percent. The PNB’s change would be effective from 2nd of August, 2012.

Here is a snap shot of home loan interest rates across various banks shown in the table below:

Good news this festive season!

The current reduction in the loan rates is expected to change the momentum of loan trends in the banking sector.  With the reduction in housing loan interest rates, banks that reduce the interest rate in current market would position itself as an affordable loan provider amongst other banks. Similarly, in the car loan segment, banks would compete to attract customers with offers and discounts in interest rates. With the festive season round the corner, most banks are likely to slash interest rates. Also there is bound to be increased consumer interest in the purchase of home, cars and consumer durables during the festive season, increasing the probability of a downward loan trend. Expenditure tends to rise this season and banks would ideally like to be in a position to offer the interested borrower the best deal! From the point of view of customers, any further rate cut by banks would be a welcome move, and they will find the prospect of a lowered interest rate burden on car and housing loan very attractive now.

Conclusion

The rate cut could well be one of the strategies for banks to take up market share in the retail loan segment. Since RBI has restricted banks from charging penalty on prepayment of loans or levying foreclosure charges on floating-rate home loans, banks that slash the rate would benefit in context of clients shifting from other banks, which are still waiting to reduce the rate. If other banks don’t follow the trend by cutting the rate, then they are likely to expect to lose a few customers in the days to come. Being the festive season, the banks are not only expected to cut the interest rates but also offer discounts in other charges to attract the customer and find a space between car and home buyers. It looks like SBI has just pushed the alarm button for other banks to wake up to a changing trend. So the current scenario looks all set for more smiles on the faces of customers in the days to come!