Banks Cutting Interest Rates in order to make Cheaper Home Loans.

However, banks are only announcing the rate cut on loan upto Rs. 2.0 million. ($42,000). No relief for the existing borrowers.  
A Construction site in New Delhi.

A Construction site in New Delhi.

Subsequent to the recent RBI’s rate cut announcement, the banks are responding and cutting down the interest rates on home loans by 50 bps to 100 bps.The interest rates are vary from bank to bank. If the borrower seeking for the home loan of Rs 2,000,000.00 (Rs. 2 million) or below, then the banks are offering loan at the rate between 9.5% and 13% on floating rate and fixed rate respectively. However, the above rates are only applicable on new home loan application for the loan of upto Rs. 2 million. (Rs. 20 lacs).

Since the property prices in Tier 1 cities are not available in the range of Rs. 2 million or so, the rate cut announcement by the banks are inappropriate and specially for the existing borrowers. Banks are only giving lower interest rates on cheap home loan and only to the new customers. The existing customers are still unhappy and didn’t get any benefit from the RBI’s Repo rate cut and Reverse repo cut. That’s why, the developers are morose too with the Indian banking Association’s (IBA) move. Many developers are against with the banks’ decision to not allowing the cheaper loan on more than Rs. 2 million.

The big question arises that, Why banks are averse to offer cheaper home loan across the board? When the interest rates went up in the last few months, then banks have raised the rates on all type of loans, whatever the loan size, it doesn’t matter. Now the RBI is cutting its benchmark interest rates, banks are not doing so. Why?

Many Banks have argued that the deposit rates are above the RBI’s benchmark interest rates and they cannot cut the borrowing cost unless the deposit rate soften. That is the reason the banks aren’t cutting down the interest rates. According to the PSU banks’ balance sheet, over 80% of home loan assets comprise the loan portfolio of Rs. 2,000,000.00. In order to cut Prime Lending Rate (PLR, the rate at which banks lend to their best customer), the banks need to cut down their deposit rates, so that the lower cost of credit will available to everyone. RBI had cut the Cash Reserve Requirement (CRR) by 350 bps in the last 3 months to improve the liquidity in the system however, the banks’ main source of liquidity is from the deposit from the customers and they cannot cut deposit rate as they don’t have enough liquidity. Main sectors are also suffering from the higher interest rates. In addition to the real estate sector, SMEs are also facing the burden of higher interest rates. Recently the World Bank have agreed to lend upto $14 billion (Rs. 67,000 Crores) in the next three years, which would help to recapitalize the state run banks. As the liquidity dried up, the banks are unable to access long term financing in order to focus on Real Estate, Small and Medium Scale Entreprises (SMEs) and infrastructure.

RBI Cut CRR To Boost Liquidity

Reserve Bank of India has been cutting Cash Reserve Ratio (CRR) by 250 bps to 6.5% from 9% a week ago. Such a type of move by the RBI is commendable indeed, however these moves are temporarily to boost liquidity which is dried up due to massive outflow from the country. Inter bank Call rates jumped to 20% even London Inter Bank Offer Rate (LIBOR) has also jumped to over 6% from 2% a month ago due liquidity conditons. Banks are even scaring to lend each other.

The recent CRR cut would release up to Rs. 60,000.00 crores in the Financial System and banks will get their reserves back so that they can meet their requirements, however the RBI shall roll back its decision any time soon when the liquidity situation improves to regular check on inflation which is already in double digit for the last 3 months.