Home and corporate loans will cost less after Reserve Bank of India (RBI), in a surprise mover cut interest rate by basis points from 7.25% to 6.75% and both home and auto loans will be sanctioned at cheaper rates banks and other financial institutions. The bolder stance by the Central Bank is seen as a move that will boost the slowing economy.
Major lenders slashed their base rates after the RBI policy announcement recently. The rate cut by RBI will help both the new and existing borrowers. The new customer will enjoy the benefit of rate cut as the banks will pass on the rate cut benefit to them anyway. For existing customers, if the bank had initially raised tenure when the rates were going up, the customer will first see the reduction tenure and then later when the rates will go down, there will be a cut in the EMIs. For existing customers the benefits will not be in the same proportion as the new customers. For example, if you have a home loan of Rs.50 lakh for tenure of 20 years an interest rate of 9.80%annum, then a 30 basis points on lending rate by any bank would mean that a borrower may save around Rs.980 per month on its existing EMI. The Central Bank also proposed to reduce the risk weights on affordable housing applicable to lower value but well collateralized individual housing loans, which will boost the housing sector. At present the minimum risk weight applicable on individual housing loan is 50%. The reduction comes on the back of interest rates being cut thrice earlier this year by 25 basis points each. Raghuram Rajan also opined that banks should be able to pass on the entire rate cut of 1.25 per cent this year to borrowers over a period of time. It is observed that banks have passed only average of 0.30 per cent to the borrowers as against RBI’s 0.75 percent cut to borrowers and blame the delays in repricing of deposits for the lag.
(The views expressed by the author in the article are his/her own.)