Your
home loan EMI is going up - again
MARCH 31, 2007: It’s
belt-tightening time for home loan borrowers.
Auto and consumer loans could also get costlier
as the Reserve Bank of India, in an all-out
attack on inflation, is tightening the noose
around banks. Unlike in the past, when bankers
extended the tenures of home loans instead
of raising the quantum of monthly payments,
this time your equated monthly instalments
(EMI) are bound to rise.
But people with money in the bank, especially
senior citizens, can rejoice. When money is
tight, deposit rates go up. Banks are already
offering rates of 9.5-10% on deposits above
one year. Rates will soon touch 10-10.5% for
deposits up to three years.
RBI has impounded bank funds to the tune
of Rs15,500 crore by raising the cash reserve
ratio (CRR), forcing banks to slow down credit
and raise interest rates. While the CRR is
going up by 0.5% in two stages to 6.5%, banks
that are short of money will also have to
pay more for short-term borrowings from the
RBI.
The repo rate – the rate at which banks
borrow from the central bank – was raised
by 0.25% to 7.75% on Friday. There is no way
banks can now offer cheap loans to anybody.
“This is an extreme step taken by the
central bank,” said Aseem Dhru, executive
vice-president and head of business banking,
HDFC Bank. “It was least expected. The
cost of funds will move up and we’ll
see a hike in lending rates.” Dhru expects
personal and auto loan rates to rise by 75-100
basis points (100 basis points make 1%).
Home loan rates are expected to shoot up
by around 0.5%. The largest player in home
loans, ICICI Bank, plans to meet on Monday
to decide on revising the home loan rates.
HDFC, the other big lender, is likely to follow
suit in due course.
The bad news is that the worst may not be
over. “The RBI measure aims to curtail
the credit flowing to overheating sectors
like real estate. We can expect further home
loan hikes during the year,” said an
official at the State Bank of India. The country’s
largest public-sector bank feels that home
loan rates will shoot up by 50 basis points
(0.5%), which means borrowers’ equated
monthly instalments will rise by Rs32-33 per
lakh for a 20-year loan.
Harpreet Singh, business director for wealth
management and distribution of loans with
Centurion Bank of Punjab, concurred. “Home
loan rates are nearing the peak,” he
said. “We do not expect a slide in interest
rates now. Inflation is on the rise and the
regulator wants to curb credit growth in the
economy.”
It’s going to hurt. Since last year,
home loan rates have grown by 2.5-3%. To shield
borrowers, many banks have already extended
the tenures, while others raised both tenures
and EMIs. This time, though, there is no alternative
to EMI increases. “We plan to reschedule
the system of monthly instalments and the
tenures,” Singh said. “As we have
increased tenures many times in the past,
we will have to increase the instalments this
time and keep tenures stable.”
The advice most personal finance advisers
are giving home loan borrowers is simple:
if you have the cash, prepay a part of your
loan to bring down the EMI.
Source: DNA India
