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After a long anticipation the Reserve Bank of India acceded to the simmering opinion of a rate cut. The central bank cut the repo rate the rate at which it lends by 25 basis points to 7.75%. It also cut cash reserve ratio (CRR) portion of deposits banks keep with it, by 25 basis points to 4%. This should usher a new wave of enthusiasm in the economy. At least the borrowers are in the mood of celebrations since they expect banks to pass on the fall in interest rates to them. It is estimated that a cut in CRR injects Rs 18000 crore in the financial system and is expected to bring down the interest rates.
In the last couple of years, as economy slowed down, demand for credit too went down. In the last one year, especially, the interest rates were on their way down gradually. Yield on the benchmark 10-year bond went down from 8.5% to 7.87% in one year.
Banks too brought down the interest rates on new home loans by 50 to 75 basis points to lure borrowers in an otherwise slowing economy. The trend is expected to continue. As the RBI went ahead with cut in key rates, banks such as IDBI Bank and RBS have also brought down their base rates, immediately. This will help the new as well as existing borrowers. A 25 basis points reduction from 11% to 10.75% means the borrower saves Rs 17 on EMI for a loan of Rs 1 lakh for a period of 20 years, which would essentially mean that the EMI of Rs 1032 falls to Rs 1015.
Given these realities, it is logical to expect further rate cuts from banks on their loan products. But this would not happen that swiftly. Banks may assess situation in the market before cutting interest rates aggressively. Deposit mobilisation has slowed down and credit offtake is catching up with banks offering special loan schemes to new borrowers. A point to note here is incremental credit deposit ratio during the last nine months stands at 102%. To mobilise deposits, some banks have hiked the interest rates in January 2013. Most of the banks will wait for further softening of interest rates by the RBI.
It is advisable to keep a close watch on the lending rates of various banks. You should prepare yourself for balance transfer if you have around 8 to 10 years of loan tenure left and / or the new home loan rate is at least 100 basis points below the existing rate. Please note that there is no prepayment penalty on existing floating rate home loans if you choose to migrate from one lender to another. While shifting from one bank to another, you can always negotiate on processing fee. Looking at the current situation, some banks would accept you with low processing fee compared with the card rate. You stand to save good amount of money in this process. But you have to have a good credit score for that, as the new lender will access your CIBIL credit score. A credit score above 750 is considered good. After 2011, almost 80% of the home loans have gone to borrowers with more than 750 credit score. Better to access your credit score before approaching bank for lower rate on interest rate.
The writer is a Co-founder & Director at www.creditvidya.com
