With RBI hiking the repo rate (the rate at which RBI lends to the banks) by 25 basis points, from 7.75 to 8 per cent last Wednesday, there are expectations that home loan, auto loan and personal loan rates could also rise.
Most bankers feel that though there may not be any immediate rise because the credit growth has been subdued in the last financial year, some banks could take the cue from the apex bank to increase their rates.
The reason is because of the fact that the cost of funds for banks would rise. At present, State Bank of India, India's largest bank, is offering 9 per cent on their five-year fixed deposits. On the other hand, the floating home loan rate is at 10.5 per cent.
"While the total portfolio has to be considered to calculate the impact on spreads, an incremental rise in the cost of borrowing could force banks to increase their rates by 25 to 50 basis points," feels a former banker.
Personal loans, which are unsecured, could see a higher increase. In fact, many expect that the overall credit scenario that is already bad for consumers, could worsen now. Many banks have already started giving lower loan-to- value (LTV) for home loans.
That is, if you approach a bank for home loan for a house worth Rs 40 lakh, it is very likely that it will sanction only Rs 25 lakh instead of Rs 32 -36 lakh (80 -90 per cent of the LTV that banks usually offered) by valuing the house at the lower price.
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However, the ones to be hit most would be the existing home loan customers. The floating home loan rates are presently hovering around 9.75 to 11 per cent. And a hike of 0.5 per cent would mean rise in the tenure or equated monthly installments (EMIs).
For instance, if you had taken a loan of Rs 40 lakh a year back at 10.5 per cent for a 15 year period, the EMI would have been Rs 44,216. However, a 0.5 per cent rise in rates would mean that the EMI will rise to Rs 45,405. Of course, if someone has age on his side, the EMI could be kept constant and tenure would increase by 11 months.
That is, while a rise in EMIs would be to the tune of Rs 1,189 per month, the tenure would mean additional payout of Rs 4,86,376. In fact, paying higher EMI is a better option because the extra payout would be less than half at Rs 1,99,752.
Many, however, feel that banks could follow a wait and watch policy now. Says D Sundarajan, chairman, Indian Bank, "I expect that both the public and private sector banks may not increase the rates immediately."
The general view is that the industry is waiting for the impact of higher oil and energy prices to reflect in the inflation numbers (already at 8.75 per cent for week ended May 31, 2008) in the next couple of weeks.
"If the inflation numbers go above 10 per cent, there is a likelihood that RBI will step in again with a CRR, repo or reverse repo hike. The rates would be hiked then," said a manager in a leading housing finance company.
