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The Reserve Bank of India (RBI) on Tuesday slashed
its key lending rate and banks' cash reserve ratio (CRR) by a
quarter percentage point each, setting the stage for a recovery in
growth.
IDBI Bank was the first to take the cue and slash the rate. IDBI Bank's loans, linked to Base Rate / Prime Lending Rate, will become cheaper following a 25 basis point reduction in its Base Rate to 10.25 per cent with effect from February 1, 2013.
Royal Bank of Scotland (RBS), too, reduced its base rate by 0.75 percentage points to 9 per cent.
Other banks are expected to follow suit. Borrowing has been sluggish and banks have been hoping that this rate cut will encourage fresh loans. The largest retail loans come from real estate sector. This sector has been slowing down due to high interest rates and excessive prices. There has been a high build up in real estate inventory.
What's more heads of various private sector banks as well as SBI have stated that they will not be cutting deposit rates. So that lending rates will fall, rates of fixed deposits are expected to remain at the same level.
The RBI rate cut has had a buoyant effect on the stock market too and it expected to ease the inflationary trend in India with the release of funds to the tune of Rs18000 crores in the market
Domino effect for the retail borrower - you
The potential real estate buyer can finally heave a sigh of relief as one can expect to see both, a drop in interest rates of home loans as well as a drop in realty prices.
Liases Foras Real Estate Rating & Research Pvt Ltd, in its third quarter review of the residential market, says the price of new launches was 24% lower than that of the existing supply, indicating signs of correction and increase in affordable housing.
The benefit for retail borrower is perceptible. Let's take the example of a new borrower who takes a loan of Rs 50 lacs for 20 years. He makes a saving of over Rs 1000 per year or somewhat more than Rs 2 lacs for the entire tenure.
| Rates | EMI | Total Interest Payable |
| At 10.50% | INR 49,919 | INR 69,80,559 |
| At 11.00% | INR 49,082 | INR 67,79,731 |
| Savings per year | INR 10,044 |
| Total Savings | INR 2,00,828 |
With the RBI reduction in rates banks are likely to pass on the benefits to their consumers, this would be right time for balance transfer of your loans as there is no pre-payment charges now on floating rate loans.
It is advisable to opt for balance transfer (i.e. shifting to a new lender) if you have at least 8 to 10 years left on a home loan that is 15 to 20 years long), or if the difference in the new rate and the old one is at least 1% per annum. Shop around with various lenders to see who will give you the best offer. Keep in mind that the new lender will want to assess your CIBIL Score and repayment history, so it might help to get your CIBIL Credit report and score.
Industry watchers expect that RBI will continue in this trend and rates may come down further, so the good times for borrower may continue.
Rajiv RajRajiv is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India’s first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.
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