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Do You Understand your Credit Policy?
Have you often found yourself baffled with
esoteric terms used in your credit policy? These are the words
like cash reserve ratio (CRR), reverse repo rates, increased
provisioning etc. Not all loan takers are able to understand
the impact of such policy measures on the rate at which they
get their housing loan. The articled sheds considerable light
on the mechanism by which the monetary policies drafted by
the central bank impact you.
Recently, the Reserve Bank of India has laid new provisions
regarding home
loan interest rates in its newly drafted credit policy,
which talks about an increase in CRR. Encouraged by the same,
most banks began increasing the prime lending rate (PLR) on
loans of one type or another. A hike in PLR affects rates
on loans. Let's see what the measures mean for the loan buyer:
Hike in CRR and its impact
CRR is an acronym used for cash reserve ratio, which is the
percentage of bank reserves to deposits and notes with the
RBI as stipulated by the section 42(1) of the RBI Act 1934.
An increase in CRR limits liquidity by bringing a decrease
in number of resources for banks to lend out of every rupee
deposit they accept. RBI hikes the CRR with an aim to siphon
out the excess liquidity in the banking system.
However, the question remains whether an increase in CRR
be translated into a rate hike or not? As per the general
perception, a smaller pool of money is usually chased by the
same number of loan borrowers, which increases interest rates.
But banking analysts opine contrary to the belief and believe
that a hike in CRR may not necessarily push up interest rates
immediately.
Even banks prefer to invest more with the RBI as reserves;
the banking system may witness surplus liquidity for a short
period. For that reason, banks don't have the choice to add
to interest rates unless the demand for credit shoots up to
an extent that all the money is lent out.
Repo & Reverse Repo Rates
The reverse repo rate is the return banks earn on excess
funds invested with the central bank against Government securities.
These rates set the floor and ceiling for risk-free overnight
borrowing and lending.
Indian Home Loans
given have to be done by increasing the risk premium which
largely depends on the borrower's credit rating. Such rates
hold importance as they set the direction for other lending
rates. A hike in the reverse repo rate translates into a high
cost of borrowing for common loan buyers. If banks are earning
good percentage by lending risk free to RBI, they can certainly
increase their profit percent by lending to others.
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