NEWS & ADVICE : HOME LOANS
HDFC Bank warns of a sub-prime crisis if interest rates are lowered
By Joseph Samson
Nov 27, 2007
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New Delhi: HDFC Bank's MD Aditya Puri, has warned of a brewing sub-prime crisis if banks continue the practice of lowering the interest rates in order to attract more customers. According to him this could lead to a higher default rate in future.

“I think that you would be taking too much credit risk if you induce interest rate to the lowering; you might end up with the crisis like the rest of the world. So I think that it has to be judicious, that the people with borrowing capabilities must have money and trying to push credit based on low interest rates that do not reflect the economy, may not be the best,” he added.

After the rate hike by the Reserve Bank of India, the interest rates on home loans and other retail loans had skyrocketed, thereby putting enormous pressure on the borrowers. This had led to a high incidence of defaults and loan off-take had also reduced drastically. With borrowers nowhere in sight and the pressure to perform mounting up, banks had to lower their interest rates. This was done without any comparable reduction in the rates by RBI.

Almost every bank rushed in with attractive festive offers in October, to grab their share of festival spending and new customers. With no respite from RBI in terms of interest rates, banks still maintained the interest rates on various loans at pre- RBI monetary policy review levels. Banks had to lower their margins in order to attract more customers.

ICICI Bank, which had earlier offered its festival discounts up to 31 October, increased it indefinitely to compete with SBI's offer, which offered reduced interest rates to new customers till 31 December. Though, the increase in CRR by RBI is causing cash crunch for small players, larger banks are willing to fight it out. There are no indications of an upward revision of interest rates on home loan and other retail loans. On the contrary there are some banks, which are willing to go a step further by giving additional discounts on their loans, to bring in more customers.


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