Inflation has begun to bite; a 12-month high of 6.7 per cent can be seen making it costly for banks to raise funds. Therefore this burden will have to be passed on to the borrowers through higher interest charged on their loans.
In view of increase in inflation IDBI Bank has withdrawn the 0.5 per cent cut in rates of home loans and other debt it had announced on Wednesday. According to industry experts more banks are likely to follow suit.
Besides from IDBI, HDFC, State Bank of India, Canara Bank, Bank of Baroda, Bank of India, Allahabad Bank and Union Bank of India had cut loan rates since February 1.
Banking sources, requested for secrecy, confirmed that they are seriously thinking of raising loan rates but are waiting to see which way inflation will head now.
Confirming inflation is the cause, IDBI’s chief financial officer R.K. Bansal told Hindustan Times: “Our decision is in line with market trends. We may reconsider after 10 days.”
A rise in interest rates is expected after benchmark security profit rose by 0.13 per cent to 7.91 per cent in the government securities market.
M.S. Sundara Rajan, chief of Indian Bank, said: “It’s too early to predict upward movement in interest rates...” A senior banker added, “We can wait till the Credit Policy next month to decide.”
Monday, March 31, 2008
Monday, March 10, 2008
UCO bank signal for reducing interest rate on home loans
On Friday state-owned bank UCO bank announced that it might cut home loan rates by 50 basis points. The final decision will be taken in the board meeting scheduled to be held on March 15.
Yet it has not been clarified whether lower rates will be offered for home loans under Rs 20 lakh. Though, the government had said that it is in favor of lower interest rates for home loans under Rs 20 lakh to meet demand. These loans comprise 80% of the advances classified under priority sector.
“We have already cut down home loan rates by 50 basis points and may further cut down the rates by another 50 basis points,” UCO bank chairman and managing director S K Goel said.
On being asked about raising capital, Mr Goel said the bank would take a view only when market stabilizes. He said in case markets do not stabilize till June, the bank would raise about Rs 250 crore through qualified institutional placement.
Smaller loans have less risk weight than those above Rs 20 lakh and, therefore, bankers have reason to lend to these borrowers at lower interest rates.
Already several banks, including SBI, Canara Bank, Allahabad Bank and HDFC, have reduced lending rates by 25-50 basis points. While The largest private bank, ICICI Bank, has said there could be softening of rates in the first quarter of the next fiscal.
SBI have fixed charges 10%-11.5% for loans up to Rs 20 lakh. Mr Chidambaram’s has recently called for softer interest rates which could mean further lowering of interest rates in the home loan segment.
Yet it has not been clarified whether lower rates will be offered for home loans under Rs 20 lakh. Though, the government had said that it is in favor of lower interest rates for home loans under Rs 20 lakh to meet demand. These loans comprise 80% of the advances classified under priority sector.
“We have already cut down home loan rates by 50 basis points and may further cut down the rates by another 50 basis points,” UCO bank chairman and managing director S K Goel said.
On being asked about raising capital, Mr Goel said the bank would take a view only when market stabilizes. He said in case markets do not stabilize till June, the bank would raise about Rs 250 crore through qualified institutional placement.
Smaller loans have less risk weight than those above Rs 20 lakh and, therefore, bankers have reason to lend to these borrowers at lower interest rates.
Already several banks, including SBI, Canara Bank, Allahabad Bank and HDFC, have reduced lending rates by 25-50 basis points. While The largest private bank, ICICI Bank, has said there could be softening of rates in the first quarter of the next fiscal.
SBI have fixed charges 10%-11.5% for loans up to Rs 20 lakh. Mr Chidambaram’s has recently called for softer interest rates which could mean further lowering of interest rates in the home loan segment.
Friday, March 7, 2008
FM acknowledges need to lower interest rates on home loans
Finance Minister having an eye on the coming state and general elections acknowledged the need to lower interest rates on home loans less than Rs 20 lakh. However he left it to the Reserve Bank of India and the bankers to take a call on it. “It is in the interest of the public to lower the interest rates on home loans up to Rs 20 lakh,” Mr Chidambaram said in his post-Budget interaction with industry heads, organized by Assocham. He added he will continue to argue for lowering rates on home loans up to Rs 20 lakh as they account for a major portion of the market. It will tackle the problems of the middle class and low income group housing.
At present 80 per cent of the borrowers take loans less than Rs 20 lakh, the finance minister said these loans had less risk weight than loans over Rs 20 lakh. Therefore, he said, bankers have the reason to lend to these borrowers at lower interest rates. “I made a number of efforts to impress upon bankers in this regard... It is a constant effort that I will have to make... Bankers will have to take a call, RBI will have to take a call,” he added.
In January, and again last month, the finance minister had managed to successfully convince public sector bankers to pare deposit and lending rates, a move that has already seen home loan rates dipping. Earlier this week, he made another ground, though bankers had said it might be difficult to implement the finance minister's advice immediately.
RBI on its part has already assigned lower risk weight to home loans up to Rs 20 lakh, making possible for banks to offer smaller loans at lower rates. But in practice, it is just the reverse. Interest rates on big-ticket home loans of over Rs 1 crore are around half a percentage point lower than rates offered for loans up to Rs 50 lakh. And those between Rs 50 lakh and Rs 1 crore cost 25 basis points less than loans up to Rs 50 lakh. Bankers attribute this mainly to lower cost of servicing and overheads.
At present 80 per cent of the borrowers take loans less than Rs 20 lakh, the finance minister said these loans had less risk weight than loans over Rs 20 lakh. Therefore, he said, bankers have the reason to lend to these borrowers at lower interest rates. “I made a number of efforts to impress upon bankers in this regard... It is a constant effort that I will have to make... Bankers will have to take a call, RBI will have to take a call,” he added.
In January, and again last month, the finance minister had managed to successfully convince public sector bankers to pare deposit and lending rates, a move that has already seen home loan rates dipping. Earlier this week, he made another ground, though bankers had said it might be difficult to implement the finance minister's advice immediately.
RBI on its part has already assigned lower risk weight to home loans up to Rs 20 lakh, making possible for banks to offer smaller loans at lower rates. But in practice, it is just the reverse. Interest rates on big-ticket home loans of over Rs 1 crore are around half a percentage point lower than rates offered for loans up to Rs 50 lakh. And those between Rs 50 lakh and Rs 1 crore cost 25 basis points less than loans up to Rs 50 lakh. Bankers attribute this mainly to lower cost of servicing and overheads.
Monday, March 3, 2008
Go for en cashing home equity than personal loan
If you are planning of expanding your business then you can go for your encashing home equity.
For instance when Nishant Sheth, a textile entrepreneur, was considering of borrowing funds to expand his business; the first option that came to his mind was applying for a personal loan. But he thought over this and had almost approached a bank, when his father asked him to reconsider.
His father suggested mortgaging the house where Nishant lived; pointing out that a loan against property would work out to be cheaper than a personal loan. Nishant saw merit in his father’s words and decided to approach the bank for a loan against his property.
Knowing the benefits mortgaging the house like Nishant, many entrepreneurs are thinking of this option as returns on business are higher than the cost of a loan against property (also called home equity loans).
Explains My Financial Advisor director Amar Pandit: “Real estate prices have shot up and business owners are looking at en cashing a part of their home equity to fund a portion of their growth. This trend has emerged because of higher home prices, need for low cost funds, and to fund investment activity.”
More and more of the small entrepreneurs who have limited access to other means for credit are considering for this. Taking the cue, banks have started promoting their loan against property portfolio. Says Vivek Vig, country head, retail bank, Centurion Bank of Punjab: “It was a hidden asset. People are realizing that it can be leveraged to boost their business.”
The loan is sanctioned after valuation of the property, establishing the ownership and assessing the repayment capability. It is also subject to the minimum market value of the property specified by the bank. Typically, the loan amount could work out to 50-60% of the property’s market value (as determined by the bank).
Though the loan can be used for any purpose, but some banks encourage the borrowers to disclose the end-use. Speculative businesses are looked down upon. The repayment of the loans can be done in equated monthly installments (EMIs) and the repayment period could range from two years to 15 years.
The plus point of taking home equity loan is the lower rate of interest. “Loans against property are 30-40% cheaper than personal loans,” informs Mr Pandit. Rates on such loans are in the range of 12-15% pa. The banks offer lower rate of interest due to the presence of a security in the form of the borrower’s house, whereas personal loans do not involve any such collateral. Moreover loans against property are given for a longer tenure, while personal loans are for shorter tenures. Also, personal loans have a tenure limit and banks cannot sanction personal loans beyond that.
“The bank will not give you a personal loan of Rs 1 crore, but you can get this kind of money if your house is around Rs 1.75-2 crore,” adds Mr Pandit. “A loan against property involves no hassles and the bank’s interference is minimal,” says Mr Vig.
A borrower must check for prepayment penalties. “Most of these loans can be prepaid in part or full without any charges or subject to certain charges. This may vary and the borrowers should check this. Also, before opting for such a loan, it is advisable to check if there are alternative sources of borrowing like loans from family, loans against fixed deposits etc,” advises Mr Pandit.
For instance when Nishant Sheth, a textile entrepreneur, was considering of borrowing funds to expand his business; the first option that came to his mind was applying for a personal loan. But he thought over this and had almost approached a bank, when his father asked him to reconsider.
His father suggested mortgaging the house where Nishant lived; pointing out that a loan against property would work out to be cheaper than a personal loan. Nishant saw merit in his father’s words and decided to approach the bank for a loan against his property.
Knowing the benefits mortgaging the house like Nishant, many entrepreneurs are thinking of this option as returns on business are higher than the cost of a loan against property (also called home equity loans).
Explains My Financial Advisor director Amar Pandit: “Real estate prices have shot up and business owners are looking at en cashing a part of their home equity to fund a portion of their growth. This trend has emerged because of higher home prices, need for low cost funds, and to fund investment activity.”
More and more of the small entrepreneurs who have limited access to other means for credit are considering for this. Taking the cue, banks have started promoting their loan against property portfolio. Says Vivek Vig, country head, retail bank, Centurion Bank of Punjab: “It was a hidden asset. People are realizing that it can be leveraged to boost their business.”
The loan is sanctioned after valuation of the property, establishing the ownership and assessing the repayment capability. It is also subject to the minimum market value of the property specified by the bank. Typically, the loan amount could work out to 50-60% of the property’s market value (as determined by the bank).
Though the loan can be used for any purpose, but some banks encourage the borrowers to disclose the end-use. Speculative businesses are looked down upon. The repayment of the loans can be done in equated monthly installments (EMIs) and the repayment period could range from two years to 15 years.
The plus point of taking home equity loan is the lower rate of interest. “Loans against property are 30-40% cheaper than personal loans,” informs Mr Pandit. Rates on such loans are in the range of 12-15% pa. The banks offer lower rate of interest due to the presence of a security in the form of the borrower’s house, whereas personal loans do not involve any such collateral. Moreover loans against property are given for a longer tenure, while personal loans are for shorter tenures. Also, personal loans have a tenure limit and banks cannot sanction personal loans beyond that.
“The bank will not give you a personal loan of Rs 1 crore, but you can get this kind of money if your house is around Rs 1.75-2 crore,” adds Mr Pandit. “A loan against property involves no hassles and the bank’s interference is minimal,” says Mr Vig.
A borrower must check for prepayment penalties. “Most of these loans can be prepaid in part or full without any charges or subject to certain charges. This may vary and the borrowers should check this. Also, before opting for such a loan, it is advisable to check if there are alternative sources of borrowing like loans from family, loans against fixed deposits etc,” advises Mr Pandit.
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