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Borrowing Binge Bar

Banks have cut rates, but as far as Indians are concerned, money’s too tight to mention

Here’s catering to the call of customers. The U-turn in the mood of the consumers to stop any purchases that involves the outgo of finances over a time span of at least 10-to-20-year duration, or even ones involving a 5-year period, has shook India Inc to the core and left it wondering what to do with thousands of crores of rupees worth of land, products and more sitting idle in their inventories.

Well, aside from slashing rates and going on fire sales, what else can you do? Well, call in the banks for a rescue and in any case they too are hurting after a long period where growth has tapered and fallen vertically down, hurting even their long-term prospects. Of course, before you call on the banks, make sure you have had a word in the ear of the authorities, who will pressure the Reserve Bank of India, which will read the riot act to the banks.

And voila! There is money plenty on offer available at extremely cheap prices. The latest to jump on the bandwagon is none other than the private sector behemoth ICICI Bank, along with the biggest lender in India, the public sector’s State Bank of India (SBI) – they have all decided to cut lending rates. 

But are the rates down enough to persuade people to go on a borrowing binge, especially after they have come to know what the citizens of America have wrought on their country, and themselves, with their spend-borrow-splurge habits – also, Indians are preening under the limelight after international financial experts showered praises on their earn-save-hoard habit and most probably it will require the Sensex to hit 21,000 and their incomes to double within the year for them to abandon their thrifty ways and even then it would be very ‘iffy’ thing.

Nevertheless, the rates on loans would be less for the borrowers, so say banks. Quickly out of the blocks was HDFC Bank, which has already lowered its prime lending rate (PLR), the benchmark rate to which all-floating rate loans are linked, by 25 basis points.

The move, which was not publicized much, also saw the company make an additional 50 basis point reduction in interest rates to new borrowers availing loans in the range of Rs 30 lakh to Rs 1 crore, done through revising the spread between the PLR and loan rate.

If one talks about figures as understood by the common man, a 25-basis point cut reduces the loan equated monthly installment (EMI) by around Rs 15 for every Rs 1 lakh loan, and a 50 basis points lowers the EMI by Rs 30.

ICICI Bank too has followed suit, this time in home, auto and retail sectors by slashing rates by half-a-percentage point to 12.75 per cent. However the bank was quick to add that further cuts were unlikely for the next six months or so, hoping to pressure potential loan seekers. This is the second time that the bank is bringing down its rates this year.

The bank believes that its cost of deposits has come down and that it is being passed onto customers in this manner. ICICI Bank CEO, Chanda Kochhar, is on record saying that her bank, since January, had lowered lending rates by 150 basis points.

Analysts are presently predicting two major reasons behind the reduction moves. While a section attributes it to the anticipation that the biggest local lender State Bank of India is likely to cut rates while others believe that there has been a change in sentiment in the retail segment as customers seem to be in a mood to pull-off large-value purchases like homes and cars.

It may be mentioned here that top SBI officials have already opined that there was scope for further cuts on loans.

Whatever be the reasons, with the present rate cut, ICICI’s rates for home loans up to Rs 30 lakh will be 9.25 per cent, the same as HDFC’s while for higher amounts, HDFC loans would still be cheaper.

If one talks about ICICI Bank, it had kept different loan slabs. A look at it would show that the rate was 9.75 per cent for loans up to Rs 20 lakh, it was 10 per cent for loans up to Rs 20-30 lakh. Similarly it was 11.5 per cent for Rs 30 lakh and above. Interest rates for loans above Rs 30 lakh would now be between 10 per cent and 11 per cent, depending on customer’s profile.

So, what does that translate into? Interest rates have fallen from their all-time highs, but are products really that much cheaper? Or have salaries increased? Or have a huge number of new jobs been created? A positive UPA agenda, GDP figures, FII/FDI investments or not, the likelihood of the people of the country, showing a Sensex-type ebullience, by rushing to banks for loans, is unlikely to happen. Why, because affected by the recession is not just domestic demand, but also the demand that was driven by Indians abroad. In other words, to the ‘we-don’t-want-the-money’ cry by the natives, add to the mix the bit about non-resident Indians (NRIs) suffering body-blows due to the extremely adverse economic conditions in the West, the worst in 45 years, and we won’t see products flying off the shelves in India.