A chain reaction is set to begin. With the increase in repo rate and reverse repo rate, banks will be expected to increase the rate on deposits, which will increase the cost of borrowing and eventually the rate of lending for home loan
The first-of-its-kind midquarterly review meeting of the RBI held on September 16, 2010, did not bring cheer to banks and home-loan borrowers. With the announcement of 25 basis points (bps) increase in the repo rate (rate at which RBI lends short-term funds to banks) and 50 bps increase in reverse repo rates (rate at which RBI borrows funds from banks) there is an apprehension of corresponding increase in lending rates by banks.
Since midMarch 2010, the repo and reverse repo rates have been increased five times. An identical increase in both rates in July led to 29 banks increasing their lending rates (for home loans) by 25 to 50 bps. A 50-bps increase in lending rate for a loan amount of R30 lakh with tenor of 20 years can result in increased tenure by up to four years, keeping the EMI constant! The increase, though targeted at taming inflation, may make a bigger hole in the pocket of the home loan borrower if there's a corresponding increase in lending rates by banks. However, the following questions need to be answered: Will banks follow suit by a northward revision of the lending rates?
If yes, then by how much?
How will it affect different categories of loan products base rate, fixed rate, teaser rate loans, floating rate (prime lending rate, or PLR)?
There were expectations of an increase in rates by RBI in the banking sector and they were largely prepared to absorb the incremental cost, at least in the short-term.
However, post-September, after the half-year closure, banks are expected to revisit lending rates.
There may be a mixed approach by banks, which will consider the next policy action of the RBI and their cost of borrowing.
The likelihood of an immediate rate hike by banks is also low on account of expected credit off-take during the festival period of October.
Increase in cost of borrowing of banks will lead to a consequent increase in lending rates.
However, as a strategy banks may only increase the base rates without changing the prime lending rates (PLR).
This will significantly affect new home loan seekers and existing home loan customers (under the new base rate scheme). However, customers under teaser home loans (fixed rate for initial few years) and floating rate scheme may be relieved in the short-term.
New customers should wait till the second mid-term review by RBI (expected towards the end of November) to assess the central bank's direction towards further hardening of prime rates before they plunge in to the EMI pool. A second round of increase may completely jeopardise their monthly household budgets.
Existing customers should prepare to pay more or pay for longer duration if there is an increase in home loan rates by banks. They may consider pre-payment of part loan to continue with the same EMI for the same tenure.
Though RBI has taken stern steps, stern steps, however, it may lead to cashflow crisis with cusmers already struggling with increasing prices of food and fuel.
The imposition of service tax and the expected increase in EMI may act as a deterrent to the growth of the real estate sector, which after a difficult period has started to show signs of recovery.
Buyers should prepare for adversities pare for adversities before finalising their dream home.
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