Loans to get even cheaper [Source: TOI 5-Mar-2009]

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Loans to get even cheaper

Banks To Pass On RBI Cut In Repo, Reverse Repo Rates
TIMES NEWS NETWORK

New Delhi: Interest rates on loans — for homes, cars and other kinds of consumer finance — are set to go down by another 0.5 percentage point following a decision by the Reserve Bank of India to cut key rates to that extent on Wednesday.
The RBI announced that the repo rate, effectively the rate at which it lends short-term funds to banks, and the reverse repo rate — which it gives on funds parked by banks with the central bank — would be cut by 0.5 percentage point with immediate effect. The new repo rate will be 5% and the reverse repo rate 3.5%.
Banks, which have been aggressively slashing rates of late, indicated after the announcement that they would pass on the RBI’s cuts to customers in the form of fresh reduction of interest rates. However, they would also cut interest rates on deposits by a corresponding amount.
Uco Bank chairman and managing director S K Goel said, ‘‘Banks will soon decide to cut rates, which should help in reviving the economy’’. A senior official of ICICI Bank also echoed this view.
In the past, banks have on occasion cut rates for new borrowers without changing the rate paid by existing ones. But this time, old customers on floating rates are also likely to benefit. That is because banks will most probably cut their prime lending rates (PLR), to which the floating rate is benchmarked.
Home loan rates are now around 10% for most public sector banks, while private sector banks are maintaining rates of 11-12%.
SBI has emerged as the most aggressive player with a special scheme under which new home loan borrowers are being offered an 8% rate. Following Wednesday’s announcement, other banks may use the opportunity to come closer to the SBI rate.


KIND CUTS

Repo rate, the rate at which RBI lends short-term funds to banks, cut to 5%

Reverse repo rate, which RBI gives on funds parked by banks with it, cut to 3.5%

Banks say they'll pass on lower rates to customers in the form of rate cuts on loans

Banks likely to reduce PLR, which would benefit existing borrowers on floating rate loans, not just new ones

Since Oct 2008, RBI has cut repo rate 5 times, from 9% to 5% and reverse repo rate thrice, from 6% to 3.5%

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