After rates hit roof in 2011, borrowers look to better days

New Delhi: Auto and home loan borrowers can look forward to better days in the New Year as interest rates, which shot up during 2011, are poised to moderate.

They peaked with base or minimum lending rate of all the banks going past 10 percent. Even the peak fixed deposit rates hovering at that level.

The central bank hiked the lending rate seven times during the year, with both repo and reverse repo rates going up by 2.25 percent. Repo is the short-term rate at which RBI lends to banks, while reverse repo is the rate at which it borrows from them.

However, in the last monetary policy review a fortnight ago, RBI left the rates at the existing levels and indicated that they may come down in the future.

"While inflation remains on its projected trajectory, downside risks to growth have clearly increased... Further rates hike may not be warranted," the mid-quarterly review of monetary policy said.

RBI Governor D Subbarao said, "I cannot really speculate on when we might start cutting rates, but that is an event, that an action that is on the way forward."

This raised hopes of the exiting as well as prospective borrowers that interest rates will fall in the coming months.

"I expect interest rate to start bottoming out from March 2012," said PwC Associate Director (Financial Services), Robin Roy.

Rising interest rates, meanwhile, resulted in the deterioration of the asset quality of banks.

The Systemic Risk Survey, conducted by RBI for the first time, has identified deterioration of asset quality as the highest risk.

The year-on-year growth rate of NPAs, at 30.5 percent as of September-end, was higher than credit growth at 19.2 percent.

Slippages, or fresh accretion to NPAs, also outpaced credit growth and grew at 92.8 percent (year-on-year).

Despite the recent spurt in NPAs, the impairment levels in Indian banks compare favourably with the banking sectors in both the advanced as well as peer economies.

Major sectors that contributed to the rise in NPAs were the priority sector, retail, infrastructure and real estate.

In the infrastructure segment, the power and telecom sectors saw increased impairments and restructuring.

There is an possibility of further deterioration in asset quality as deceleration in credit growth is expected on account of slowing economy, the RBI report said.

At the same time, some of the reports suggested that NPA level is expected to cross Rs 1.5 lakh crore by the end of the current fiscal.

As per banks` latest postings, NPA levels saw 33 percent increase year-on-year for the September quarter. Under the system generated approach, a loan turns NPA on the 91st day of non-payment of EMIs.

The overall Gross NPAs of the banks stood at Rs 1,16,954 crore, 2.7 percent of the total advances as on September 30, 2011, according to a study.

These are watchful time for banks as NPAs are on the rise. Banks should take hard look at the existing portfolio, Roy said.

In bid to thicken the cushion against the risk, the government infused capital into the many public sector banks.

During 2011, the government provided a sum of Rs 13,946 crore for infusion in the Public Sector Banks to maintain Tier I Capital to Risk Weighted Asset Ratio (CRAR) at 8 percent and increase government equity in some banks to 58 percent.

Some of the lenders which got fund infusion include Bank of Baroda got Rs 2,461 crore, Indian Overseas Bank - Rs 1,054 crore, Punjab National Bank - Rs 184 crore and Oriental Bank of Commerce - Rs 1,740 crore.

However, the country`s largest lender State Bank of India, which has been making a case for the capital support to the tune of Rs 20,000 crore for more than 2 years, is still to get funds from the government.

RBI also ended the era of controlled interest rate regime by freeing savings bank deposit rates.

"...banks are free to determine their savings bank deposit interest rate," RBI said in its mid-quarterly review of the credit policy in October.

While freeing interest rates on savings bank accounts, RBI said that banks will have to offer a uniform interest rate on deposits of up to Rs 1 lakh.

For savings bank deposits of over Rs 1 lakh, banks would be free to provide differential interest rates.

Prior to this, banks were mandated to give 4 percent interest rates on such deposits.

Following the deregulation, some of the banks including YES Bank, Kotak Mahindra Bank raised the savings rate to about 7 percent.


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