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Business News/ Opinion / Online-views/  Why are home loan, FD rates falling?
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Why are home loan, FD rates falling?

If you like FDs, lock in now

SBI was the first to lower interest rates on home loans. Pradeep Gaur/MintPremium
SBI was the first to lower interest rates on home loans. Pradeep Gaur/Mint

Banks seem to have finally budged and reduced interest rates on loans and even fixed deposits (FDs) in some cases. However, none of the private banks and foreign banks have joined the bandwagon yet.

On 31 July, the Reserve Bank of India (RBI) reduced statutory liquidity ratio (SLR) to 23% which could help ease borrowing for the private sector. Says Brinda Jagirdar, head of economic research, State Bank of India (SBI), “To ensure that there is an increase in credit offtake, SLR was reduced."

SBI was the first to lower interest rates on home loans. In the absence of reaction from other banks, on 19 August, finance minister P. Chidambaram stepped in and urged government-run banks to cut interest rates on retail loans.

Bankers seem to have taken a cue from that and major government-run banks have slashed home loan rates ever since. SBI and Oriental Bank of Commerce (OBC) have also reduced FD rates for select maturity periods.

Why are loan rates going down?

In addition to the nudge from the government, there are a few other reasons that have led to decline in rates.

Festive season: Every year, home loan demand soars from mid-September owing to the onset of the festive season. Says Prashant Joshi, head (private and business clients), Deutsche Bank India, “As the festive season beckons, banks are gearing up to meet the increased demand on the home loan front. So it is not surprising that some banks are beginning to relook at their rates with a view to increase their customer loan offtake."

Decline in company borrowing: Says Sonal Varma, economist, Nomura Financial Advisory and Securities (India) Pvt. Ltd, “Credit demand from companies is low and hence there is no point for banks to maintain high deposit rates as there are no takers." This is forcing banks to woo retail customers and they are doing so by slashing interest rates.

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Shyamal Banerjee/Mint

Why are FD rates going down?

As of now, SBI and OBC are the only banks to have revised their interest rates on FDs. Says S.L. Bansal, chairman and managing director, OBC, “The credit growth is muted and hence we have cut the deposit rate." There are a number of other factors that are affecting FD rate cuts.

Call market effect: The call market is lending at a lower rate, which in turn can affect interest rates on retail deposits. “Currently, liquidity in the market is comfortable," says Jagirdar. Call rate is the inter-bank interest rate on funds. Banks borrow from the call market for their short-term needs. However, when liquidity is tight, banks sometimes depend on their own bank deposits to fulfil their needs. Since liquidity is comfortable now, banks are under no pressure to lend at higher rates.

Says Ashutosh Khajuria, president, treasury, Federal Bank Ltd, “Normally, retail deposits rates are supposed to be cheaper than wholesale deposit rates. Currently, wholesale deposit rates are coming down and hence automatically FD rates will also come down. Also if you look at the administrative costs for banks, dealing with retail deposit turns to be costlier for banks."

Rate cut effect: Some experts say that this could be an outcome of the cut in loan rates.

Says Adhil Shetty, CEO, Bankbazaar.com, “The FD rate has been reduced to protect the margin spread of the banks. The reduced home loan rate has the potential to cut the bank’s net margin, but a simultaneous decrease in FD rate would curb the effect."

The tenor of FDs also makes the difference. Says Joshi, “If you look at FDs, rates for short tenors are higher. Banks’ liquidity at various tenors drives FD pricing in addition to macroeconomic conditions."

What it means for you?

Rates are only headed lower at this point. “The interest rate cycle has clearly hit the peak and is seen coming down," says Jagirdar.

FDs: If you are an extremely conservative investor, lock into a long-term FD as soon as possible. This is because FD rates have peaked and chances are that rates will further fall. If interest rates go down, the real rate of return on FDs, after factoring in inflation, will be much lower. However, there are other instruments such as medium-term debt funds and non-convertible debentures that you can look at if you are a bit more aggressive.

Home loans: For new borrowers, it’s sure a reason to cheer. However, as long as the base rates remain the same, the change in home loan interest rates will be minuscule.

Existing borrowers can either wait for their bank to lower rates or consider switching after a while. If rates have already been reduced for new customers, existing customers can bargain with their bank. Says Suresh Sadagopan, a Mumbai-based financial planner, “Right now it may not make sense to switch loans because most banks have cut their interest rates, so chances are that your bank may also slash rates. Instead bargain with your existing bank."

If you plan to switch your loan, factor in the processing fee, documentation and other charges. At present, the option of switching loan to a lower interest one may be easier said than done.

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Published: 11 Sep 2012, 08:15 PM IST
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