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Home > Business > Business Headline > Report


Cheap loan party to end with Diwali

Anita Bhoir & Poornima Mohandas in Mumbai | November 08, 2004 09:03 IST

The cheap retail loan party is nearing its end. Though banks are pushing home loans for as low as 7 per cent rate of interest and car loans at 8 per cent, even offering to return 5-10 per cent of the money spent via credit cards, the good times are not going to stretch beyond the festive season.

With Diwali less than a week away, almost all banks, including the public sector ones, are waiving processing and documentation charges on loans to capture as much of the market as possible before interest rates start crawling upward.

While ICICI Bank is offering 7 per cent floating rate housing loans, the State Bank of India is handing out special Dussehra housing loans at 7.25 per cent and car loans at 8 per cent.

Even Punjab National Bank has slashed its interest rate by 1.50 per cent to sell festival season housing loans at 7.75 per cent for five years. It aims to push 1,000 housing loans by December in Mumbai alone. PNB is also offering competitive car loans at an interest rate of 8 per cent.

Once the festival season ends, however, retail loans will get costlier.

In fact, ICICI Bank had on Friday announced it would hike housing loan rates after the festive season. The bank may also raise automobile loan rates.

State Bank of India chairman AK Purwar, too, said home loan rates might go up. Other state-owned banks like the Bank of India, PNB and Union Bank of India are likely to take a cue from SBI.

The recent mid-term annual statement of the Reserve Bank of India came as a double whammy for the retail credit market. The increase in the prudential risk norms and the raising of the short-term repo rate indicate a hardening of interest rates.

Another factor pushing up interest rates is the booming demand for credit from companies in the retail segment and the infrastructure sector. As a result, surplus funds in the system have virtually dried up, down from an high of over Rs 60,000 crore (Rs 600 billion) several months ago.

Apprehending an asset bubble, the central bank increased the risk weight for housing loans to 75 per cent from 50 per cent and on consumer credit, including personal loans and credit cards, to 125 per cent from 100 per cent. Bankers expect the 125 per cent risk weight to apply to car loans too.

However, credit card and personal loan rates are not expected to see an immediate rise as there is ample margin to take care of increased capital charges.

"We do not visualise any change in the credit card market in the form of higher interest rates or annual fees. The banks themselves are likely to bear the increased costs," Shyam Srinivasan, head of credit cards and personal loans at Standard Chartered Bank, said.

According to a recent Crisil report, banks' housing assets stand at Rs 75,000 crore (Rs 750 billion) and they will have to allocate an additional Rs 1,700 crore to meet the new prudential norms. In the personal loan and credit cards market, banks will have to allocate another Rs 500 crore (Rs 5 billion).

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