Banks are free to decide lending rates; no RBI diktat: IBA

Last Updated: Monday, January 18, 2010 - 23:14

Mumbai: Indian Banks` Association on Monday said
banks are free to decide interest rates and the Mumbai: Indian Banks` Association on Monday said banks are free to decide interest rates and the Reserve Bank cannot give instructions on rates in today`s liberalised environment.

"Interest rates are a function of supply and demand, banks are free to decide their interest rates ... We have not received any communication from the Reserve Bank to frame guidelines for banks on teaser rates," IBA`s Chief Executive K R Ramakrishnan told PTI here.
Ramakrishnan was responding to a media report, which said the apex bank has asked the banks` industry body IBA to formulate guidelines to restrict banks offering very low interest rates for a short period.

"It is a liberalised environment now and instructions on interest rates cannot come from the RBI," he further said.

Last week RBI deputy governor Usha Thorat had expressed concerned over banks offering teaser rates to outsmart one another in their bid to capture more market share in the multi-crore rupee mortgage market. However, SBI Chairman O P Bhatt had stoutly defended the practice saying teaser rates had rekindled demand.
Banks, under special schemes, offer cheaper interest rates mainly on home loans for the first few years of the credit period (teaser rates). It was all started by SBI last year. Though another market leader HDFC criticised the practice, it too cut rates to woo more customers. Soon others like ICICI Bank joined the bandwagon.

"Teaser rates by banks is a cause of concern. Banks must ensure that borrowers can service higher rates when rates return to normal," Thorat had said.

IBA is the industry lobby of Indian banks and has members from private, public and foreign sectors.

Banks offer homeloans at very cheaper rates, as low as 8 per cent for a fixed period, say 1-2 years, after which the rates will go back to floating rate structure.

The scheme, earlier scheduled to end in November, was extended till March 2010, following a huge demand from the market.

PTI



First Published: Monday, January 18, 2010 - 23:14

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