MUMBAI: Home loan and corporate borrowers have something to cheer about early in the year. Interest rates on home and other loans, particularly for Tax deduction on home loan corporates, are set to fall soon. The Reserve Bank of India (RBI) has cut its key policy rate by one percentage point, signalling a reduction in banks’ lending rate.
This time, banks that many corporates still see as reluctant to lend, have reacted swiftly. Union Bank of India was the first to announce a 25-75 basis point cut in deposit rates across maturities on Friday night.
Allahabad Bank too announced that it would cut its prime lending rate by 75 basis points to 12.5%. Other banks are expected to follow suit over the next few days, after they have reduced their deposit rates.
Private banks, however, may wait a while before they decide to cut rates, according to officials in these banks.
The consensus among bankers is that at best, interest rates could go down by 50-100 basis points. A further cut in lending rates will make cheaper credit available to borrowers and boost demand.
Friday’s package will also give firms under stress, including those in real estate, an opportunity to restructure their loans. In a policy move co-ordinated with the Central government’s stimulus package, RBI on Friday reduced its repo rate, the rate at which banks borrow from RBI, from 6.5% to 5.5%.
The reverse repo, the rate RBI pays to banks for parking funds with it, was slashed by one percent from 5% to 4%, the lowest ever. The cash reserve ratio, the slice of deposits that banks need to park with RBI, has also been reduced by 50 basis points to 5%.
This is the fourth time since early October 2008 that the central bank has eased its monetary policy stance, after having adopted a tight policy since October 2004. The liquidity infused into the financial system through these measures amounts to Rs 300,000 crore.
With Friday’s move, another Rs 20,000 crore will be available for lending. According to Chanda Kochhar, CEO designate, ICICI Bank, interest rates are likely to see a fresh correction. “Interest rates are likely to fall between 0.5% and 1%. In the past, banks had to wait for bulk deposit rates to come down. However, bulk deposit rates have already started falling.
“Demand for investments will take a little while to pick up as corporates will first wait for their inventory to wind down,” she added.
ICICI Bank had cut rates earlier this week, and Ms Kochhar said the bank has not taken a decision on further rate cuts. She, however, feels there would be simultaneous cuts in deposit and lending rates, a view that senior officials of some state-owned banks do not subscribe to.
MD Mallya, CMD of Bank of Baroda said, “In fact, there is a case of further softening of interest rates, given that there are expectations that inflation will come down further.” A senior HDFC Bank official said the bank would wait and watch before it takes a decision on interest rate cuts. However, he feels there will be a cut of between 0.50% and 1%. A senior Axis Bank official said the bank’s rates are among the lowest, and it is likely to cut its deposit rates first.
According to Ajit Ranade, group chief economist, Aditya Birla group, the impact of the monetary measures on real sector will take time.
“A reduction in interest rates also brings down the treasury yields on bond portfolio of banks, which leads to substantial capital appreciation. As for borrowers, the issue is more of access to credit than cost of credit. In such a situation, banks will make a lending decision based on their risk perception of the proposal. Bank lending will ultimately depend on business confidence,” he said.
MV Nair, CMD of Union Bank of India, said there was adequate liquidity in the system to support the credit growth requirement. ”We expect the demand for credit to go up following the stimulus package,” he said.
Unlike this time round, the measures announced in December by RBI were aimed at certain sectors, including SMEs and real estate. Interestingly, credit growth was quite strong in the previous quarter, during which a series of monetary and fiscal packages were anounced.
SS Kohli, CMD of India Infrastructure Finance Company (IIFCL), said the National Highway Development Authority is expected to sanction projects worth Rs 1,25,000 crore in the next two years.
”Several port projects are also in the pipeline. We expect a robust credit flow to all these projects with the money raised from the market. We would raise the first tranche of tax-free bonds by the middle of next week. Since there is a lag between raising money and its disbursal, we will raise the second tranche as the disbursal of the first tranch progresses,” he said. IIFCL has been allowed to raise Rs 30,000 crore through tax-free bonds.
RBI data indicates that since the beginning of the September quarter, credit growth was higher compared to the same period last year. Since the beginning of October, loan disbursals touched Rs 1,02,061.2 crore, compared to Rs 87,000 crore in the same period last year. Deposits, too, were higher at Rs 1,06,670 (Rs 64,055 crore).
According to Hemant Mishr, MD and head global markets, Standard Chartered Bank, “The repo and reverse repo cut of 50 bps was already factored into the market. Given the aggressive monetary easing, we would expect the bond market to rally significantly. This would lead to deposit and lending rate to ease up further. Given that the government has no more latitude towards fiscal measures, we continue to expect an aggressive monetary stimulus of a further 100 bps repo rate cut and a CRR of 150 over the first half of this year.”
Friday’s package will soothe firms under stress. Loans that were standard accounts on September 1, 2008 would be treated as standard accounts on restructuring, provided it is taken up on or before January 31, 2009. The restructuring package would also have to be in place within 120 days.
Source : http://economictimes.indiatimes.com/Pers
onal_Finance/Loan_Centre/Home_Loans/Home
_Loans_News/Home__corporate_loans_to_get
_cheaper/articleshow/msid-3928865,curpg-2.
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