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HindustanTimes Thu,02 Oct 2014

Rates are falling. What should you do?

Vivina Vishwanathan , Hindustan Times  New Delhi, September 14, 2012
First Published: 23:12 IST(14/9/2012) | Last Updated: 01:57 IST(15/9/2012)

Banks seem to have finally budged and reduced interest rates on loans and even fixed deposits (FDs) in some cases. Last week a few private banks have joined the bandwagon.

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

SBI was the first to lower interest rates on home loans. In the absence of reaction from other banks, finance minister P Chidambaram on August 19 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 reduced home loan rates ever since. SBI and Oriental Bank of Commerce (OBC) have also reduced FD rates for select maturity periods.http://www.hindustantimes.com/Images/Popup/2012/9/15_09_Biz5.jpg

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. “As the festive season beckons, banks are gearing up to meet the increased demand on the home loan front,” said Prashant Joshi, head (private and business clients), Deutsche Bank India. “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: “Credit demand from companies is low and hence there is no point for banks to maintain high deposit rates as there are no takers,” said Sonal Varma, economist, Nomura Financial Advisory and Securities (India) Pvt. Ltd. This is forcing banks to woo retail customers and they are doing so by slashing interest rates.

Why are FD rates going down?
As of now, SBI and OBC are the only banks to have revised their interest rates on FDs. “The credit growth is muted and hence we have cut the deposit rate,” said SL Bansal, chairman and managing director, OBC. 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,” said 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.

“Normally, retail deposits rates are supposed to be cheaper than wholesale deposit rates,” said Ashutosh Khajuria, president, treasury, Federal Bank Ltd.  “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.

“The FD rate has been reduced to protect the margin spread of the banks,” said Adhil Shetty, CEO, Bankbazaar.com. “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 tenure of FDs also makes the difference. “If you look at FDs, rates for short tenors are higher. Banks’ liquidity at various tenures drives FD pricing in addition to macroeconomic conditions,” said Joshi.

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,” said 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. “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,” said Suresh Sadagopan, a Mumbai-based financial planner. “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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