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Reduced home loan interest rates, awaiting green signal from RBI

Banks may reduce home loan interest rates if RBI holds rates stable

Apnaloan.com Research Bureau

04 Jan 2008

Waiting for a cue from the Reserve Bank of India (RBI), banks may reduce interest rates on home loans and personal loans by 50-75 to basis points.

However, the decision to cut interest rates will depend on the outcome of the RBI's monetary policy meeting slated for 30 January.

Slow credit growth in the last year, 2007 may prompt the RBI to reduce interest rates on retail loans. Bankers expect the decision to soften interest rates in light of the fact that there is a slowdown in credit growth.

Almost all bankers are unanimous that interest rates, particularly on home loans have peaked and a decline is inevitable, although they differ on the timing of such cuts.

On the other hand, bankers feel that auto loan interest rates will remain at present levels, at least in near future. A slack demand in the auto loan segment is being cited as the main reason. The demand for car loans has been satisfactory but high interest rates have made the two-wheeler loan segment a 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, and personal loans witnessed a high delinquency rate. Some leading lenders 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 the sub-prime segment.

Lower interest rates would mean lower EMI burdens helping reduce the delinquency rate.

Private sector banks are keeping their fingers crossed but public sector banks, already bearing high deposit rate burdens have their own reservations about the benefits of the reduced interest rates. As per 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 interest rates are reduced as deposit rates have still not eased down."