Home, auto loans to decelerate as banks up retail ante

Retail loans, from home and auto loans to education and personal loans, are set to moderate in the coming days as some banks have slashed their interest rates by up to 50 basis points (bps), while others are planning on doing so.

To begin with, PSU lender Central Bank of India has decided to reduce home loans by 10 bps to 10.65 per cent for loans ranging Rs 30-75 lakh and to 10.9 per cent for above Rs 75 lakh from this week.

For loans up to Rs 30 lakh, it is available at 10.5 per cent akin to the bank’s base rate. Similarly, it has reduced 50 to 200 bps in other forms of retail loans.

(one basis point is equivalent to one hundredth of a per cent) Central Bank of India General Manager (Retail) Ram Sangapure said, “When credit from corporates is not picking up much, it is better to focus on retail loans.

Reduction in interest rates on retail loans will encourage people to spend. The purpose is to increase the number of loan accounts with higher volume.”

An expansion of retail loans will drive consumptions in the country, he said, adding, “This in turn, will create room for corporate credit demand.”

Even as RBI is yet to show any inkling of a fresh rate cut, hopes of softening interest rates on banks’ retail loans raises prospects of lessening borrowers’ burden, who are currently reeling under high interest rates.

It may be noted that Finance Minister P Chidambaram in his first meeting with bankers had asked them to reduce equated monthly instalment (EMI) on home loans and other retail credit including auto, education and personal.

Chidambaram viewed it as a prescription to arrest economic slowdown in the country as retail loan growth will translate into higher demand for corporate loans since companies invest in capacity to cater to rising consumption.

Early this month, the country’s premier lender State Bank of India (SBI) had brought down retail loans on accounts of home, auto and education by up to 50 bps. Then other PSUs like Punjab National Bank and Bank of India followed. 

So were the associates of SBI group like the listed State Bank of Bikaner and Jaipur (SBBJ), which has cut retail loan rates by 50-75 bps.

It is now offering home loans at 10.75 per cent irrespective of any loan amount or tenure, while auto loans are in the range of 10.75-11 per cent. What’s more? Online application will fetch additional relaxation of 25 bps for auto loans.

“Expanding retail credit is one way to revive the slowing economy. This strategy works. In 2008, SBI group home loans were available at around 8.50 per cent. That finally led to higher demand for credit in the overall industry. Of late, we had seen increased industrial activities,” said SBBJ Managing Director Shiva Kumar.

However, banks are not changing their base rate or the minimum benchmark rate below which lenders are not allowed to lend. Rather, they are reducing the spread or the mark-up that is added on and above base rate to price a loan.

Some more banks including IDBI Bank, Punjab National Bank, Bank of India and others are likely to review interest rates on retail loans in their respective asset liability committee (ALCO) meetings.

The benefits of retail loan growth are many. Explains IDBI Bank’s Executive Director R K Bansal saying non-performing assets (NPA) are less in home loan segment. “Retail loans give banks a scope of diversification that mitigates risk of concentration.”  

Moreover, Bansal points out, it helps in meeting priority sector targets for a bank, while any home loan up to Rs 25 lakh is considered as priority sector loans that enjoy some interest subventions. “A cut in retail loans depends on individual bank’s cost of funds

We are considering a revision of interest rates on retail loans. Soon, we will take a final decision at our ALCO in this regard,” he added.