Home, auto loans will be costlier

Home and auto loans would soon get costlier after the Reserve Bank of India raised policy rates by a higher-than-expected 50 basis points, or bps, to rein in stubborn price pressures.
 
Corporates, too, will feel the pinch with increase in cost of borrowing. However, one good news is that interest rates on short-term deposits could move up. A 50 bps increase in policy rates comes as a surprise. The hike in rates would have an impact on high value loan demand, said Keki Mistry, HDFC vice chairman and chief executive officer.  In its first quarter monetary policy review on Tuesday, RBI increased repo or lending rate to 8 per cent  and reverse repo or borrowing rate to 7 per cent.  This is the eleventh time since March 2010 that the central bank has raised rates to tame demand-led inflation. As a swift reaction to RBIs rate measures, private lender Yes Bank announced 50 bps rise in lending rates, with immediate effect. The bank raised its base rate to 10. 25% and prime lending rate to 19. 5 per cent. The State Bank of India, the country’s largest bank, is also gearing up to increase lending and deposit rates. The rise in cost will be passed on to customers. Banks have to compete with insurance and asset management companies to mobilise resources for which the bank will have to offer competitive rates. Accordingly, we would see increase in shortterm deposit rates, said SBI chairman Pratip Chaudhuri.
 
On July 7, SBI had raised its base rate or minimum lending rate and benchmark prime lending rate by 25 bps each to 9. 50 per cent and 14. 25 per cent, respectively. Other banks, including ICICI Bank, HDFC Bank, Oriental Bank of Commerce and Union Bank of India, raised lending rates in mid-July following the central banks rate increase on June 16. At present, for a Rs.30 lakh home loan at an interest rate of 10. 25 per cent for 20 years, a customer pays an equated monthly installment (EMI) of Rs. 29, 449 per month. A 25 bps increase in home loan rates will lead to EMI rising by Rs  502 per month. However, banks usually increase the tenure of home loans rather than EMI to ensure minimal stress on borrowers. Similarly for car loans, currently interest rates are about 12-13 %.
For a Rs.5, 75, 000 lakh loan at 12 per cent rate for five years, a customer pays an EMI of Rs 12, 791 per month. A 25 bps rise in car loan rates would increase EMI by Rs 72 per month
 RBI also revised its fiscal year-end credit growth projection to 18% from 19%. Credit growth is expected to moderate in financial year 2012. There are no fresh investments coming up, the current loan demand is coming from existing projects, said MD Mallya, CMD, Bank of Baroda. Bankers fear that the rising cost of credit could put pressure on banks asset quality and margins. Non performing loans in rate sensitive sector are expected to increase, which include education, car and real estate loans, Chaudhuri said. HDFC Bank MD and CEO Aditya Puri also expects bad loans to rise. However, he does not see this leading to any systemic problem. Speaking on margin pressures Puri said, There would be some pressure on margins. However, we are  a people’s bank and would pass on the cost to customers