Posted by: Pradeep | July 3, 2008

Interest rate hikes in India

Reserve Bank of India in persuit to control the money supply / demand in market has hiked repo rates twice last month. This naturally has resulted in interest rate hikes on lending by most of the banks and other expected to follow suit.
This rate hikes would affect all new borrowers as well who’ve opted for floating rates, quite badly. But this might prove to be especially burdensome for home loan borrowers since their loans extend for a longer duration. The impact is difficult to quantify at this point. A rough estimate would put that with a home loan of Rs 50 lakh, a borrower will have to cough up Rs 1,38,000 more on his EMI this year than he did three years ago. That will be quite a burden on a borrower already reeling under double-digit inflation.
The increasing EMIs, on the other hand, may result in rise in default rates by existing customers. This is something that the banks have to anticipate and take pre-emptive measures. One way to stall defaults would be to extend repayment periods while keeping EMIs the same. But that is a choice that should rest with customers.
The banks also should behave responsibly by not tempering with EMIs / duration for customers who have opted for a fixed rather than floating rate of interest. It’s part of the risk and reward profile of a fixed rate customer that he benefits when general interest rates shoot up. Not passing this benefit onto him would amount to cheating. Any bank indulging in such an unfair practice must be pulled up.

All dark clouds have a silver lining. The hike in lending rates has necessitated an increase in deposit rates by as much as 0.75 percentage points. This would help small savers as well as pensioners, who depend on bank fixed deposits as a risk-averse saving. But, for the time being, we are entering a high interest regime once again with all its attendant costs.

Source: read in TOI

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