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Rate cut rigmarole
Rate cut rigmarole.Thanks to RBI Governor Raghuram Rajan\'s a categorical ‘no’ for the policy rate cut, citing reasons as the banks are still to pass on the benefits of earlier two rate cuts to their borrowers.
If banks announce rate cut, affecting its base rate, then across-the-board, all borrowers will get some benefit. But, if the rate cut relates to specific group like home loan, it will give staggered benefit and in most of the cases, apart from new borrowers, the floating interest rate loan payers will get the benefit
Thanks to RBI Governor Raghuram Rajan's a categorical ‘no’ for the policy rate cut, citing reasons as the banks are still to pass on the benefits of earlier two rate cuts to their borrowers. This has led to a quicker cut in rates, by the largest lenders, SBI and HDFC Bank by 15 bps and ICICI Bank by 25 bps. Further, to match with the industry, on Sunday, the public sector lender SBI had once again announced a cut in the home loan interest rates up to 0.25 per cent. However, it was quick to mention that the rates were applicable only to its new borrowers, thus went up the curtains on rate war.
No doubt, the rate cut always cheers borrowers. But the real issue whether the benefit is minimal or not. Let us look at how the whole thing operates. If banks announce rate cut, affecting its base rate, then across the board all the borrowers including home loan borrowers will get some benefit. But, if the rate cut relates to specific group like home loan, it will give staggered benefit and in most of the cases, apart from new borrowers, the floating interest rate loan payers will get the benefit.
The effective interest rate would be base rate plus premium and not the base rate. Hence, the bank rate for the retail borrower is negotiable, depending on the size and other security guards. For instance, on Rs 1 lakh borrowed for 20 years, at the reduction of 0.10 per cent, the EMI will reduce to Rs 11 per month. However, the branch offices are yet to receive the circular, explaining how to calculate the retail lending rate after adding the premium for the new borrower, says an official who is not willing to be quoted.
And in the case of existing customers, they say only floating rate customers will be benefited, and the benefit would be somewhere around 0.15 per cent.Elaborating further, unlike earlier occasions where the processing branches need to manually alter in computer system, now the same can be changed at central server level, since the banks are operating under the core banking system. The alteration will be applied uniformly to all accounts, they pointed out.
Thus, the trend in interest rates will have two-way impact on retail borrowers. If there is a hike in the policy rates, it would immediately transform into higher interest rates on all the loans and impact those borrowers who take loan on floating rate basis. Hence, there is rise in the EMIs for home loans also. But if the policy rate cut is smaller, the banks cannot reduce lending rates immediately and the banks' cost of funds will not come down, hence they cannot increase lending rates.
However, as part of the competition, the banks eventually have to reduce the lending rate but it will be applicable only to the new borrowers, if the rate cut is not on base rate. While for the existing borrowers the same rate will be maintained. Here comes the remedy, the borrowers can now switch over to new lenders, who may offer better rates.
By K V V V Charya
