ATM :: Home loan rates may not ease in near term

Tuesday, 17 March 2015 – 5:15am IST | Agency: dna | From the print edition
Home loan consumers can be forgiven if they ask in frustration – will the home loan rates ever come down? Most home loan consumers seem to think that RBI controls the home loan rates and since RBI has dropped rates they wonder why they have not seen it being reflected as reductions in their monthly EMI’s.

They have heard the RBI governor say that it has done what it can and it is now for the banks to take up the cue. The finance minister has also been ‘nudging’ the public sector banks to get them to reduce “interest rates” but only three of them have responded so far with token cuts in base rates.

Here is why home loan consumers can forget about any reduction in their monthly EMI burden any time soon.

In the past whenever the banks have faced pressure to drop interest rates they have tom-tommed the reduction while glossing over the fact that the “reductions” were only for new consumers and the old borrowers continued to pay the high rates. The banks were able to do this by reducing the spreads without changing the base rates. Every single bank (whether public or private) has done this after the “transparent” base rate mechanism was put into place in July 2010. (See box for examples of the two largest banks). As a result of this continuous reduction in spreads however a situation has been reached where the spreads are close to nil (around 15 to 25 basis points) for most banks. Now the scope for banks to reduce the rates only for new home loan consumers is very small as banks are not allowed to drop spreads below zero.

Hence if the banks have to reduce interest rates now they have to look at reducing the base rate itself. In that the banks are absolutely correct in arguing that the average cost of funds comes down only after a lag and hence it will be sometime before the base rates can come down. If this truthful and correct explanation is met with a howl of disbelief the banks have only themselves to blame as in the past they have raised the base rates when RBI raised rates (and market interest rates went up) without waiting for their average cost of funds to rise first. RBI has winked at this increase in base rates which was against its own regulations.

In fact in a quite move RBI has now officially allowed the banks to change the basis of its base rate calculation every 3 years (instead of 5 years earlier) and more importantly without requiring any RBI approval. The umpire has officially allowed one side to change the rules without even informing them or the other side about it.

In any case even if the interest rates were to reduce the existing home loan consumers will not see any actual reduction in monthly EMI amount since the benefit will be passed on by way of reduction in number of EMI’s left to be paid. Effectively the saving will come after a really long time. So much for theory that the consumer will spend more from the EMI savings and provide a fillip to the economy.

The one segment of borrowers who can probably get some relief are the small and medium businesses who are currently paying a very high spread over the base rates and in that segment the banks can probably announce some cosmetic reductions that will only apply to new borrowers in that segment.

In fact the current situation is ripe for a move towards complete transparency since that will justify the non-reduction of interest rates in the near future. This will also reduce the pressure on the finance ministry as they can point to the transparent linkage mechanism. Hopefully the new way of doing things will ensure that if not immediately at least sometime in the not-so-distant future even home loan consumers will see Acche Din.

Harsh Roongta, director, Apnapaisa

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