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Interest rates get a nudge up
- Long chain of dropping levels snaps

Mumbai, Dec. 22: After a long period of dropping interest rates, there is just a faint hint of a reversal.

Two institutions today raised interest rates, going against the trend that has held for some time. Banking sources do not recall an increase and that, too, very marginal, since August 1999 with the rate of inflation also first dropping below 5 per cent and then even under 2 per cent.

Today’s upward revisions were hardly steep either. The Union Bank of India pushed up the interest rate for housing loans by 0.50 percentage points across all maturities.

If that is the bad news for the New Year — Union Bank’s higher rates take effect on January 1 — IDBI Bank brings good tidings, particularly for senior citizens. It raised the interest rate by 0.25 percentage points to 5.50 per cent for fixed deposits of one year to three years. For above three years, the rate will be 5.75 per cent, up from 5.50.

Speaking for IDBI Bank, Rahul Vora said the decision to raise the rate had been taken to draw savings account holders. It is offering senior citizens an additional 0.50 per cent interest for deposits of over six months’ tenure, a PTI report said.

There is also a bonus of 0.25 per cent for someone depositing over Rs 15 lakh for a tenure up to six months.

Union Bank chairman V. Leeladhar explained: “The rates on housing loans have bottomed out and we decided to raise rates to check chances of delinquency like defaults on payment.”

“(Home loan) Data has thrown up indications of delinquency. Though the rate is almost insignificant, it is still above rates expected or anticipated earlier,” he added.

Competition among lenders has seen housing loan rates decline sharply with borrowers being offered highly attractive terms — at times even more than the amount sought to take care of accompanying expenses of acquiring a house or flat.

Union Bank’s new rate for housing loans up to five years will be 8.50 per cent (8 earlier) for loans that have a fixed interest rate. For floating interest loans, the rate will be 8.25 per cent (7.75).

For loans between five and 10 years, the respective rates will be 9 per cent (8.50) and 8.75 per cent (8.25).

The jury is out on whether the two decisions signal the end of falling rates.

“There is no such move within our bank,” said a senior ICICI Bank official, responding to the possibility of interest rates going up.

A top official of the Life Insurance Corporation also said the institution was not planning a rate revision just yet.

Observers, however, feel some of the circumspect banks could now come out in the open and jack up rates.

“There are banks who are waiting for others to take the lead. Shortly, we should see others following suit. But the Union Bank move sends a clear message that interest rates on home loans are not likely to fall further,” an analyst said.

Agreement is almost total on this: that interest rates have hit the bottom. The rate of inflation is also not where it was even a year ago — the trend has reversed with the current level beyond 5 per cent and closer, in fact, to 5.50 per cent.

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