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House, Car Loans Costlier SBI, UBI Increase Rates; Other Banks To Follow Soon

By Shashank, Section News
Posted on Fri Jun 27, 2008 at 04:09:27 AM EST

Sorry, here is some bad news for those with house, car or any loans from banks. Interest rates have just gone up. Therefore, the EMI on loans will either become heftier or will have to be paid out for a longer period. On Thursday, the country’s premier bank, State Bank of India, and Union Bank of India increased the rate by 50 basis points.

This means SBI’s prime lending rate will be 12.75% and that of UBI will be 13.25%. The other banks are likely to follow suit very soon — in every likelihood before the month is over. Apart from your EMI nightmare lengthening, the rate rise spells bad news for the housing and auto companies, as well as those making consumer durables like TV, washing machines and fridges as the high interest rates are expected to dampen consumers’ enthusiasm to buy.

The rate rise will not only increase the cost of new loans, but will also make all the existing floating rate loans such as home loans, retail loans and consumer loans costlier by half a percentage point.

An increase in the interest rate by half a percentage point on a 20-year home loan leads to an EMI increase of about 4%. In the last three years, home loans have soared from 7.5% to 11.5%. This has led to increase in the EMI by almost 35%, hitting the realestate sector badly.

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Not just that, all the corporate loans will now become costlier. SBI CFO Askok Mukand, however, hoped that the credit offtake would continue to be strong. He said that credit growth would be in the range of 20% to 21% in the current financial year. Other banks to follow SBI
New Delhi: Following SBI’s hike in interest rates, other banks are likely to increase the rates soon. The CMD of a public sector bank said that the repo rate announced by RBI is a kind of a direction from the central bank to the banks to increase their lending rates.

He said that the immediate effect of this is that the interest rate on short-term funds will go up. Such an increase in the interest rate, it is believed, will help contain the demand for goods and services, which in turn, will help in moderating inflation.

Public sector banks like Punjab National Bank, Union Bank of India and Bank of Baroda are likely to announce the rate increase before July 1, 2008. A top banker said that the new rates would kick in from July. He said that the rate rise will be in the range of 50 basis points to 100 basis points. Small banks will increase the rate by around one percentage point as RBI’s tight money policy is affecting them more.

Other private sector banks like HDFC Bank had raised their rates even before RBI increased its policy rate on Tuesday by 25 basis points to 15.25%. A senior HDFC Bank official said that following the increase in the CRR and repo rate by RBI, the bank will again review its interest rates soon. The country’s largest private sector bank, ICICI Bank, will also review its PLR soon.

Private sector banks, a senior banker said, are likely to increase their rates more sharply than large public sector banks. He said that the dependence of private sector banks on overnight borrowing is much higher. Therefore, the tight money policy followed by RBI would affect them more.

Source: Times News Network 27/Jun/08

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