Home loan takers room for ease shrinks

MARCH 13, 2007: Individual borrowers have probably seen the sharpest-ever annual increase in interest costs since January 2006, with rates rising 300 basis points. Home loan takers have felt the pinch the most, as nearly 90 per cent of incremental borrowings are floating rate loans, unlike shorter-term personal or two-wheeler loans which are given at fixed rates.

Companies have also been hit hard as the increase in interest rates in the past year has been much sharper for them. Most banks are charging interest rates on loans to companies at the prime lending rate (PLR) minus 1 percentage point, against PLR minus 3 percentage points in January 2006. So, the increase in the effective interest rates for companies has been 5 percentage points.

For home loan borrowers, half the increase in interest costs has taken place in the past three months, amid signs that the upward bias would persist in face of the continuing high inflation. The equated monthly installment (EMI) on home loans over the 15-year period has increased by about 25 per cent.

The interest rates on personal loans have gone up by similar margins as for home loans. The range at which banks provide personal loans has increased to 14-24 per cent from 11-24 per cent.

However, the demand for loans to buy cars and two-wheelers has been less impacted by interest rate increases, on account of rising income levels. Also, for vehicle loans, the impact of rising interest rates has been annulled by extension of repayment tenures. The average repayment period for new car loans has increased to 48 months from around 36 months in 2003-04. Similarly, for two-wheelers the average repayment period has increased to two-and-a-half years from two years in 2003-04.

Source: Business Standard