The Telegraph
Since 1st March, 1999
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RBI lights rate fire, loan pot on the boil

Mumbai, July 25: If you are planning to take a loan to buy a flat or a car, you had better apply right away as banks are preparing to raise their retail lending rates.

The move comes after the RBI raised its key interest rate by quarter of a percentage point to 6 per cent ' the highest level in the past four years.

Home loan rates have already started to go up with LIC Housing Finance raising its by a quarter percentage point.

Deepak Parekh, chairman of HDFC, one of the biggest home loan financiers, had indicated that rates would be raised if the RBI bit the bullet.

RBI governor Y.V. Reddy has done just that ' this is the third time he has raised the key interest rate this year. He indicated that there could be more revisions.

There are suggestions that other consumer loan rates, covering auto, personal and consumer durables, will also rise.

ICICI Bank managing director and chief executive officer K.V. Kamath said the bank would follow the policy indications given by the RBI. Others like Standard Chartered Bank will take a decision shortly.

The RBI had surprised everybody by hiking interest rates on June 8, almost immediately after the government raised fuel prices. This time, the rate rise was expected.

“Banks like ICICI Bank, which had increased the rates following the RBI’s surprise hike on June 8, might not raise them again. However, those like HDFC, which had not increased the rates then, will be forced to do so,” a banking source said.

How it will affect you

What does all this mean for the man on the street'

“I had taken a floating rate home loan six months ago for a tenure of 15 years. How will I be affected'” asks Satish Nair.

Existing home loan customers might be spared.

Why' Retail loan rates are linked to the prime lending rate (PLR) ' a benchmark for all loans ' and banks tweak the spread to increase or decrease the interest rates on new loans.

For example, if the PLR of a bank is 11 per cent, it gives retail loans at a spread of 2.75 per cent, which means, at 8.25 per cent. Now the bank might increase or decrease the spread, without changing the PLR itself. This will affect only new borrowers, not existing ones like Satish.

However, if the bank changes its PLR, the rates for existing floating rate home loans will also change.

Let us suppose Satish was issued a home loan at 8.25 per cent indexed to a 11 per cent PLR. If the bank raises its PLR to 11.25 per cent, his home loan rate will go up to 8.5 per cent.

In other words, the repayment period of Satish’s loan will go up by five to six months, which means his 15-year loan will widen to 15 years and six months.

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