The Telegraph
Wednesday , January 30 , 2013
Since 1st March, 1999
CIMA Gallary

Banks signal loan relief

- Hope of EMI dip as RBI cuts repo rate

Mumbai, Jan. 29: Home and auto loan borrowers may finally get the chance to pare a part of their EMI burdens.

On Tuesday, the Reserve Bank cut the policy-making interest rate — the repo — by 25 basis points to 7.75 per cent, the first interest rate cut since the aggressive half a percentage point reduction last April.

The repo is the rate at which the RBI lends money to banks.

A few commercial banks said they would consider paring their benchmark rates to which the various categories of retail loans are linked.

State-owned IDBI Bank kicked off the process by lowering its base rate by 25 basis points to 10.25 per cent a couple of hours after RBI governor D. Subbarao tweaked monetary policy.

While the repo rate cut was anticipated, the big surprise was the reduction in the cash reserve ratio (CRR) by 25 basis points to four per cent. Banks have to park a percentage of their incremental deposits with the RBI in the form of a cash reserve.

Several banks failed to cut their benchmark rates after the RBI slashed the repo last April, thereby denying their existing borrowers the benefit of lower EMIs. Even State Bank of India — the largest bank in the country — cut its base rate only in late September, a full five months after the RBI had announced its first rate cut in three years last April.

But commercial banks may not rob existing borrowers of the benefit from the rate cut this time round.

IDBI Bank’s move to cut the base rate will benefit existing and prospective corporate and retail borrowers. Banking pundits say if lending rates are reduced by 25 basis points, a home loan borrowers’ equated monthly instalment (EMI) will go down by Rs 17 per Rs 1 lakh for a 20-year loan.

The chiefs of some of the larger banks were, however, more circumspect. They said the banks would pass on the rate cut benefit but refused to confirm whether this would be transmitted through a reduction in the base rate.

“There is a case for transmission (in the form of lower lending rates). Each bank will have to make that call. But the mood is in favour of lending rate cuts,” said K.R. Kamath, chairman & managing director of Punjab National Bank (PNB).

Aditya Puri, managing director of HDFC Bank, said it was premature at this stage to say whether the bank would trim its benchmark rate as well.

State Bank of India chairman Pratip Chaudhuri said the bank’s asset-liability committee — which decides on lending and deposit rates — would meet tomorrow. Chaudhuri refused to say whether the bank would cut its base rate which currently hovers at 9.75 per cent. But he said most banks would trim lending rates as they were keen to ratchet up their credit growth rates.

“There will be a positive impact on EMIs,” said Chanda Kochhar, managing director & CEO of ICICI Bank, suggesting that the largest private sector bank might bring down its base rate.

ICICI Bank was one of the few lenders that cut its base rate last April soon after the repo rate went down.

There is a flip side to the rate cuts: banks will be tempted to lower their deposit rates as well. Senior bankers said the deposit rate cuts may not be across the board as banks are facing competition from alternate saving products like mutual funds.