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Money Just Got Dearer...

Monday, November 11, 2013
By Mayura Shanbaug

In a regime of high interest rates borrowers need to evaluate their current interest outflow and look at options to either switch or renegotiate with lenders to lower their interest rate burdens and save money

With the largest public sector lenders in the country, State Bank of India (SBI) and private sector bank HDFC increasing interest rates by 20 basis points on loans across the board, including home and auto, may have been explained as a mere catching up step with interest rates of other banks. Yet it certainly is indicative of the things to expect in the future. This move may not have invoked a sharp reaction from industry watchers, but the repercussions will certainly be felt by everybody.

“It is quite imperative that other banks will soon follow suit as their cost of funds have gone up due to the recent hike in repo rate announced by RBI,” says Rajiv Raj, Co-Founder & Director, CreditVidya , an investment and credit advisory firm.

It is believed that typically, credit growth picks up in the third quarter of every financial year. But now a hike in interest rates may keep people from taking loans, believes Raj. The repo rate has moved up 50 basis points since July (to the current level of 7.75 %) by the Reserve Bank of India (RBI).

“Till the inflationary concerns are not addressed we will be in a regime of high interest rate,” feels Raj.  “Borrowers need to evaluate their current interest outflow and look at options to either switch or reprise with lenders to lower interest rate burden and save money,” he suggests.

According to V N Kulkarni, Chief Counselor with the Bank of India-sponsored Abhay Credit Counseling Centre, following the diktat by RBI that banks should rely more on deposit rates to increase their net interest margins (NIMs) will see many bankers also increasing their deposit rates in the near future.

Already, indicating a hardening of interest rates, major public sector lenders Punjab National Bank (PNB) and Canara Bank have raised fixed deposit rates on various maturities by as much as 0.50 % last week.  ”The increase in fixed deposit rates will certainly  lead to a hike in lending rates sooner or later,” says Kulkarni. 

The direct effect would be seen on consumer loans off take; mainly auto and housing.

The equated monthly instalments (EMIs) would go up by Rs 500-600 on a 20 years loan of Rs 20 lakhs.  “It is the middle class which will bear the maximum brunt of this,” says Kulkarni. “Their monthly out goings have already spiralled with high cost of groceries and vegetables. Now with EMIs going up further, overall savings will come down,” he explains. The overall savings ratio coming down will not be good for the country eventually,” he says, adding “The next monetary policy will play a crucial role in deciding the direction of interest rates.”      

How will this affect the auto and housing sector is the big question. The “Hike in interest rate is not good news for the already struggling automobile sales. In the last quarter there has been a fall in off-take of auto loans. This festival season also witnessed a lot of freebies been offered by the car manufacturers and dealer to stimulate auto sales,” says Rajiv Raj. “The same has been the case for real estate. For a home buyer is severely impacted on account of any rise in interest rates and no dramatic corrections in real estate prices,” he says.

Rising financing costs are all the more painful, because India’s real estate developments take a long time to build because of a vast and often corrupt regulatory apparatus. Publicly traded real estate investment groups in India are heavily in debt, so they struggle to make interest payments and are not in a position to bankroll further projects. That combination has produced an almost unanimous bearishness about the short-term prospects for residential, commercial and industrial real estate prices in India.

Sanjay Dutt, the Executive Managing Director for South Asia at Cushman & Wakefield, predicted that real estate prices would fall 10 % in big Indian cities and 15 % on the outskirts of large cities, where many speculative projects have been built. “Given the sentiment of the market, there could be a sharp correction between now and Gudi Padwa,- an annual festival next March that has long been considered in India an auspicious time to buy real estate,” said he.

Similarly, India’s vehicle sales growth is expected to remain in the negative in the current fiscal year ending March 2014, an industry expert said last week, despite car sales rising for the first time in 10 months in August. It is not just sales; production of most categories of vehicles was down in the first half of this financial year over the same period last year.

During April-September, passenger vehicle production was down a little over 2% at 1,523,654 units and that of commercial vehicles dropped nearly 12% to 363,714 units, with the numbers for heavy and medium commercial vehicles falling over 21%.

Among two-wheelers, production of motorcycles and step-throughs was marginally down at 5,960,264 units, while mopeds fell 11% to 346,350 units. In April-September 2013, while passenger vehicle sales fell 5% to 1,200,792 units, commercial vehicles dropped by 15 % to 3,26,648 units, of which medium and heavy commercial vehicles fell by a steep 25 % to 105,497 units.

“I do not see any positive benefits to borrowers when interest rates go up. On the other hand the impact would be so severe that many borrowers will be forced to extend the tenor of loans if they wish to pay the same EMI,” says Rajiv Raj.

“We have seen in past that the subsequent rise of repo rate have ended up in negative amortization of the loans, which means that borrower only services interest payment for a longer period of time, pushing their debt further,” he concludes. 

Incidentally, in this age of credit card and EMI purchases the consumer goods segment could also be adversely affected.

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