The year 2011 was action-packed for us as depositors and borrowers. We smiled as deposit rates climbed with the Reserve Bank of India (RBI) hiking the repo rate by 2.25 percentage points over seven policy reviews in 12 months, but dug deeper into our pockets as home loans bit harder and rates rose between 3 and 3.5 percentage points. As consumers, the world got just a bit fairer, with the savings rate getting market-linked, more credit bureaus offering choice and prepayment charges on home loans beginning to fade away.
Savings rate got market-linked
After at least a decade of debate, RBI finally deregulated the savings bank account interest rate. From 25 October, each bank could decide on what it will pay its savings bank account holder. Says Rana Kapoor, managing director and CEO, Yes Bank Ltd: “This is an orbit changer intervention by RBI and gives far superior proposition to savers and depositors and shifts the dynamics from lazy to active. Secondly, it will also catalyse service innovation activities to a far greater effect.” The rate earlier pegged by the regulator at 3.5% was bumped up to 4% in May.
The deregulation saw the smaller banks rush in with a higher rate for the race to get more depositors. So far, five banks (Yes Bank Ltd, Kotak Mahindra Bank Ltd, IndusInd Bank Ltd, Ratnakar Bank Ltd and Karnataka Bank Ltd) have hiked this rate. Yes Bank last week rushed ahead to hike the rate to 7%. As per the regulator, banks have to pay a uniform rate to all customers having savings account balance of up to Rs 1 lakh. If your account balance is above Rs 1 lakh, banks are free to choose interest rate range. For instance, IndusInd Bank and Kotak Mahindra Bank have hiked savings account interest rate to 6% per annum for balances above Rs 1 lakh; the rate is 5.5% for deposits less than Rs 1 lakh. Each percentage point rise in deposit rate on each Rs 1 lakh adds Rs 1,000 to your interest earning.
If you are thinking of switching banks, should you worry about the interest rate downturn? Says Rajeev Ahuja, head (strategy and financial markets), Ratnakar Bank Ltd, “We are pretty comfortable with our current rate and don’t see a need to change in either direction. If the regulator effects a change, a resultant impact may make us revisit. Else we see it as sustainable for the long term.”
Most experts believe that even when the overall interest rates start falling, savings account rates won’t go below 4% due to high level of competition among banks.
Home loan rates went up...
With policy rates going up 225 basis points (bps) in 12 months, the overall cost of money increased, causing grief to existing borrowers on floating rate-linked loan products.
One basis point is one-hundredth of a percentage point.
The base rate, the minimum rate at which a bank can lend to any customer, has increased sharply in the last one year. The base rate of the three largest banks—State Bank of India (SBI), ICICI Bank Ltd and HDFC Bank Ltd—has increased from 8% at the beginning of the year to 10% now. The rate hikes also left the benchmark prime lending rate (BPLR), at which banks used to lend earlier and that charged to old customers still, of SBI at a 15-year high of 14.75%, a hike of 200 bps from the beginning of the year.
The steep hike in base rate resulted in higher equated monthly instalments (EMIs) for existing home loan customers. On a tenor of 20 years, the EMI per Rs 1 lakh is now around Rs 1,000-1,100 compared with Rs 870-950 earlier. For home loans of Rs 20 lakh, EMIs have gone up by as much as Rs 3,000. Borrowers who could not afford the hike opted for a hike in tenor instead. “Banks do not increase the tenor on their own. Upon receiving the request from customers, we generally increase the repayment tenor (wherever possible) so that loans do not become bad loans,” says S.C. Sinha, executive director, Oriental Bank of Commerce.
...as did FD rates
Fixed deposit (FD) rates rose 200-300 bps over the year. While SBI is offering 9.25% interest on five-year FDs, Dhanlaxmi Bank Ltd is currently offering the highest rate in the market—10.10% for a tenor between three and five years. Some other banks, including South Indian Bank, too, are offering as high as 10% for deposits with a tenor of 300 days.
For senior citizens, rates offered are even higher. While most banks are offering 50 bps more to senior citizens, some banks are even offering 75 bps extra.
Prepayment charges fading out
Borrowers of three largest housing finance companies—HDFC Ltd, LIC Housing Finance Ltd and Dewan Housing Finance Corp. Ltd—smiled as the National Housing Bank did away with any prepayment cost on loans. If you have a floating rate loan, you can now switch lenders without any charge. However, those on fixed rate loans will have to pay if they switch lenders through a loan; prepayment through own funds wouldn’t cost them money. For those on a fixed-floating loan, the fixed rate rule would apply till the fixed rate tenor, but once the floating rate tenor starts, you would be free of the prepayment penalty clause.
The banking regulator has been soft on home loan vending banks. However, it has nudged them into doing away with this market restrictive practice. In fact, a few banks have already done it. ICICI Bank, SBI and Central Bank of India have scrapped these charges, while Axis Bank Ltd did not have prepayment charges to start with. Those with floating rate loans from ICICI Bank can now switch or prepay without penalty. SBI has gone a step further and freed up both fixed and floating rate loans from these charges. Most other banks, however, remain reluctant and the regulator may need to use the stick if just words don’t work.
The year 2011 saw credit scores for consumers finally make their entry into India with the first credit bureau, the Credit Information Bureau (India) Ltd (Cibil), introducing its credit score in April and Equifax Credit Information Services Ltd following suit in December with its risk score. Cibil’s credit score will assign you a number between 300 and 900, while Equifax will rate you from 1 to 999. The better your credit history, the higher would be the score.
The credit score will help banks predict the likelihood of a borrower defaulting over the next 12-month period. An account goes into default when it crosses the 90-day mark of no payments. If the score helps the banks gain data about you, you gain by maintaining a high score with lower rates on borrowings.
The year saw it becoming easier to access your credit score. Experian Credit Information Co. of India Pvt. Ltd allows you to pay cash to get your report by walking into any of the 65,000 bank branches across India having the national electronic funds transfer facility. Cibil allows you online access to the credit score and report.
Says Arun Thukral, managing director, Cibil, “The consumer will get the credit score and the report via an email in around two days.”
• Expensive Money (PDF)
• Depositors Smiled (PDF)
• Borrowers Cried (PDF)
PDF by Yogesh Kumar/Mint