With RBI gradually exiting its accommodative monetary policy, it is likely that it would hike its key rates soon. Paying attention to this, State Bank of India has already started considering withdrawal of its 8% home loans and car loans schemes. SBI's present scheme will end on November 7. According to a snior bank official, SBI will take a final view within a week. SBI had introduced the home loan rate at 8% for one year in February.
Besides SBI, other public sector banks are also considering the same. Banks had announced low interest loan schemes to revive demand in home loans and car loans that was decreasing due to global slowdown. RBI had also taken several steps to inject liquidity in the system. These measures proved to be quite helpful.
In RBI's quarterly policy review, governor D Subbarao said that RBI's main concern was to put a check on rising inflation. This signalled the banks that rates were likely to go up, prompting them to consider withdrawing the low interest schemes.
The banks are apprehensive that RBI may increase Cash Reserve Ratio (CRR), the proportion of deposits that banks need to keep with central bank, by 50 basis points to 5.5%, sooner or later, to suck out excess liquidity from system.
Bankers say that these special schemes offering low interest rates were launched in February to attract new borrowers in order to revive the economy. At that time banks were burdened with old deposits at high interest rates, making cost of fund high. If banks had banks cut the benchmark rates at that time, interest rates on existing loans would have come down, making yield from loan lower than cost of fund. Therefore they announced lower interest rate schemes without slashing the benchmark rates.
Over a period of time, high cost deposits have been repriced at cheaper interest rates, thus bringing down the overall cost of the fund. When SBI had launched its special schemes in February, it had a benchmark rate of 13.25% and it offered home loan at 12 %. Now its benchmark rate has declined to 11.75% and home loan rate to 9.25-10%.