EMIs set to pinch pockets more

Festival interest rate discounts may be rolled back.

Get ready to cough up a bit more on consumer loans and mortgages, and also earn a little extra on your bank deposits. With the festive season drawing to a close, interest rates are finally set to harden.

While consumer loan rates will be costlier between half-a-quarter and half-a-percentage point, interest rates for up to 1-year deposits may rise by one full percentage point to 7 per cent for some banks that are finding it difficult to mop up fresh liabilities.

Bankers expect the deposit rates for the six-month- to one-year maturity to rise to 6-7 per cent from the current 5.00-5.60 per cent. For most banks, the rate for up to one-year deposits can increase to 6.50 per cent and for banks on the fringes, to as high as 7.00 per cent.

To shore up liquidity, banks, both public and private, have started redeeming their investments in mutual funds citing tightness in liquidity.

The lending rates for corporates have already gone up. It is now the turn of retail borrowers, including for housing and automobile. Festival discounts in interest rates can be withdrawn much before the announced offer period. Festival offers for retail loans in most cases are till the end of December 2005, but some banks are planning to quietly bury the offers and start charging higher interest rates.

The liquidity squeeze was being felt as foreign institutional investor inflows had halted and the rupee was weakening, adding to the pressure created by credit growth, a public sector banker said.

Deposit growth continues to lag credit growth. In 2005-06 so far, credit growth since April 1 has been Rs 1,31,442 crore, much higher than the growth in deposits of Rs 97,799 crore.

"With the festival season being over, banks will slowly raise their rates. The existing home loan takers may not feel the heat as the equated monthly instalments (EMIs) do change with the rise in rates. Only the maturity period of a loan gets longer. However, the new borrowers will feel the pinch as they will have to pay a little extra for their EMIs. Ditto about car loan seekers," said a banker. The average rate on home loan is likely to go up from 8-8.5 per cent to about 9 per cent.