Sudhir Verma, a Delhi-based marketing consultant, is a worried man. His home loan EMIs have jumped by more than Rs. 16,000 or by over a third over the last three years as banks lost no time in raising interest rates each time the Reserve Bank of India (RBI) hiked its key lending rates to tame prices.
But Verma, like thousands of others, are puzzled that despite more than a one-percentage point cut in the RBI’s repo rate, his EMIs have remained stuck at high levels as banks haven't really reduced lending rates.
The RBI has progressively cut the repo rate- the rate at which it lends to banks-to 7.25% now. A lower repo rate, by definition, should bring banks borrowing costs and, in turn, goad them to slash lending rates to borrowers.
In reality, however, it hasn't happened, forcing many like Verma to make expenditure adjustments to avoid a default on home loans.
Bankers said the EMIs will start falling only when banks are able to cut deposit rates-the interest that you earn on money parked in savings and fixed deposits with banks.
“When banks are unable to cut deposit rates, how will be they able to cut lending rates?
Deposit growth has been subdued and banks have to keep the deposit rates high to attract depositors,” said executive director of a public sector bank.
Bank deposit growth has remained muted largely because people preferred other assets such as gold to park money as a consumer inflation rate of more than 10% and fixed deposit interest rate of 9% means the returns on your bank deposits are actually negative.
“Banks are relying heavily on short term funds to meet their funding requirement which is also keeping their borrowing cost high,” said Ananda Bhoumik, senior director- financial institutions, India Ratings & Research — a Fitch group company.
Bankers say that lending rates may come down if RBI cuts repo rate and cash reserve ratio (CRR) or proportion of deposits they have to park with RBI. A CRR cut will leave more money with banks to lend to borrowers.
“A CRR cut will give us extra liquidity to lend," said a chief financial officer of a public sector bank.