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« ‘Property demand to spike after RBI cut’ | Home | Bandra, Mumbai’s costliest real estate belt, flat rates soar 300% in 6 yrs »

Cut in lending rate unlikely as cost of funds still high

Borrowers may have to wait a bit longer before their monthly instalments or EMIs get trimmed as lending rates on home loan may not be reduced in the near future. Even though bankers are expecting a rate cut from the Reserve Bank of India (RBI) in the annual money policy review scheduled for April 17, lending rates may not go down in a hurry because the cost of funds for banks still remains high.

“Reduction in interest rates may not happen immediately even if RBI brings down key policy rates,” said M Narendra, chairman and managing director, Indian Overseas Bank.

Bankers say that cost of funds for them still remains high. Recently, some banks like State Bank of India (SBI) increased interest on deposits of up to one year.

A senior SBI official said, “Rates will take a while to start coming down. We have said that base rate or minimum lending rate will remain at present levels for some time. We will also wait for RBI guidance.” Bankers’ expectations of a rate cut have gone up after the date of Index of Industrial Production (IIP) for the month of February reported less-than-expected numbers.

The central bank had raised key policy rates 13 times during March 2010 to October 2011 to contain rising spiralling inflation. It has, however, kept interest rates unchanged since its December policy announcement.

Even though lending rates haven’t dropped for more than two years, banks have tried to give partial relief to their customers. Banks such as Oriental Bank of Commerce and Union Bank of India have reduced the base rate by 10 basis points. IDBI Bank also reduced interest on home loans by 25 basis points.

At present, the repo rate, which is the rate at which banks borrow from RBI, stands at 8.5 per cent. Cash reserve ratio (CRR), which is the percentage of deposits banks have to park with the central bank, is at 4.75 per cent, following a surprise reduction of 0.75 percentage points a week ahead of the annual budget last month.

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