Home loan rates expected to decline by 50-75 bps
By Joseph Samson
Jan 4, 2008
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New Delhi: Anticipating a cut in key interest rates by the Reserve Bank of India (RBI) in its monetary policy meeting slated for 30 January, bankers feel that home loan and personal loan interest rate might get softer by 50- 75 basis points.

The slack credit growth experienced by most banks during the last year might prompt RBI to provide necessary correction. Almost all the bankers are unanimous that the interest rates, particularly on home loans have peaked and a decline is inevitable however, they have different opinions on the timing of such event.

While Ashvin Parekh of Ernst & Young believes the home loan rates to drop by 50-75 basis points during the last quarter of this financial year, Rana Kapoor, CEO and MD, Yes Bank says, "while there might not be a reduction in the interest rate in January, there could be a slash in the interest rate during April by half a per cent."

Though, a decline in home loan and personal loan interest rates is very much on the cards, bankers feel that auto loan interest rates will remain at present levels, at least in near future. A slack demand in auto loan segment is being cited as the main reason for the rates staying at the same levels. The demand for car loans has been satisfactory but the high interest rates has made the two-wheeler loan segment, an absolute non-performer.

Bankers also feel that the reduced interest rates will also have its impact on the default rates, which climbed steeply after the home loan interest rates skyrocketed. Credit cards, home loans, auto loans, two-wheeler loans, personal loans, all the major segments witnessed a high delinquency rate. Some leading are experiencing a default rate as high as 10 percent for personal loans. The situation is more serious in small-ticket personal loans and many banks have backed off from providing such loans to sub-prime segment. The lowered burden on EMI's due to a lower interest rate will help reduce the delinquency rate.

Private sector banks are keeping their fingers crossed but the public sector banks, which are already bearing the burden of high deposit rates have their own reservations about the benefits of the reduced interest rates as noted by a senior public sector bank official "Even if there is a cut in the interest rates by the RBI, lending rates may not come down significantly as our cost of deposits are still high. We will suffer huge margin losses if reduce interest rates, as deposit rates have still not eased."

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