TOUGH TIMES-Loans to get costlier as RBI ups rates

Mumbai: Get ready to pay more on your home loans, car loans and consumer loans. For industry too, the cost of funds is set to rise. Late on Tuesday, the Reserve Bank of India hiked two key policy rates — the repo rate and the cash reserve ratio — by a steep 50 basis points (100 basis points = 1%). The intensity of the hikes appears to have caught a lot of people by surprise, and leaves little doubt that for the Manmohan Singh government, runaway prices represents clear and present danger.
    Financial sector players say banks will raise interest rates by half a per cent or more, and the stock market could take another knock when it opens on Wednesday.
    Aimed at reining in an inflation rate that is now at a 13-year high of 11.05%, RBI raised the repo rate to 8.50% from 8% with immediate effect. It also decided to increase the CRR from 8.25% to 8.75% in two stages. From July 5, the CRR will be set at 8.50% and from July 19 at 8.75%.
    This is the second time in less than a fortnight that the RBI has raised the repo rate to contain inflation. It’s the rate at which banks borrow from RBI. A hike in the repo rate will make it more expensive for banks to get money from RBI, which is likely to force them to charge customers a higher interest rate. On June 11, the RBI had raised the repo rate by 25 basis points. Last month, it had raised CRR by 50 basis points.
    RBI’s decisions are expected to force banks to raise interest and deposit rates. Higher interest rates will affect those who wish to borrow to buy a house, a car, or consumer durables like fridges and TVs, and it will also hurt those who have taken home loans on a floating rate basis. Higher rates also mean that corporates now have to pay more as interest costs. ‘‘The question is not whether rates will go up, but by how much,’’ said a senior official with a domestic financial house.

 

To rein in inflation, RBI hikes repo rate and cash reserve ratio by 50 basis points. Repo rate raised to 8.5% from 8%, and CRR to 8.75% from 8.25%

 

Co-ops may find it easier to offer home loans

CO-OPERATIVE banks will find it much easier to extend home loans in the future, if the loans are for only a small portion of the property value. The Reserve Bank of India (RBI) has linked the risk weight on home loans provided by co-operative banks to the loan-to-value ratio of the advance extended.
    Hence, for home loans up to Rs 30 lakh and below 75% of the value of the property, banks will need to set aside only 50% of the capital they are required to maintain earlier.
    If the loan is for more than Rs 30 lakh in absolute terms but still less than 75% of the property value, the capital requirement will be 75% of standard requirement. However, if the bank provides loans for more than 75% of the value of the property, there is no relief in capital adequacy requirement.
   
CO-OPERATIVE banks will find it much easier to extend home loans in the future, if the loans are for only a small portion of the property value. The Reserve Bank of India (RBI) has linked the risk weight on home loans provided by co-operative banks to the loan-to-value ratio of the advance extended.
    Hence, for home loans up to Rs 30 lakh and below 75% of the value of the property, banks will need to set aside only 50% of the capital they are required to maintain earlier.
    If the loan is for more than Rs 30 lakh in absolute terms but still less than 75% of the property value, the capital requirement will be 75% of standard requirement. However, if the bank provides loans for more than 75% of the value of the property, there is no relief in capital adequacy requirement.
    For banks, the amount of capital they are required to set aside for each loan is decided by the minimum capital adequacy ratio prescribed by the central bank. Capital adequacy ratio is the ratio of a bank's net worth to its risk-weighted credit exposure. The risk weightage, in turn, is the ratio which determines the credit risk in a particular loan asset. Although capital adequacy ratio is fixed at a flat 10% for banks, RBI reduces the capital requirement by increasing or reducing the risk weightage for loans in certain sectors. For instance, for home loans up to Rs 30 lakh, the risk weightage on the loan is 50%. What this means is that banks will need to set aside only 50% of the capital they keep aside for loans with a 100% risk weightage.
    RBI increases or reduces the risk weightage depending on its perception of risk in a particular sector. The higher risk weightage reduces the banks loss in the event of a default. It also discourages lending to that sector by making it more capital intensive.
    The central bank has also relaxed branch and ATM licencing for co-operative banks, subject to their maintenance of a minimum CRAR of 10% on a continuous basis. The co-operative banks also needs to have net NPAs of less than 10% and should have made a profit in the preceding year.

For banks, the amount of capital they are required to set aside for each loan is decided by the minimum capital adequacy ratio prescribed by the central bank. Capital adequacy ratio is the ratio of a bank's net worth to its risk-weighted credit exposure. The risk weightage, in turn, is the ratio which determines the credit risk in a particular loan asset. Although capital adequacy ratio is fixed at a flat 10% for banks, RBI reduces the capital requirement by increasing or reducing the risk weightage for loans in certain sectors. For instance, for home loans up to Rs 30 lakh, the risk weightage on the loan is 50%. What this means is that banks will need to set aside only 50% of the capital they keep aside for loans with a 100% risk weightage.
    RBI increases or reduces the risk weightage depending on its perception of risk in a particular sector. The higher risk weightage reduces the banks loss in the event of a default. It also discourages lending to that sector by making it more capital intensive.
    The central bank has also relaxed branch and ATM licencing for co-operative banks, subject to their maintenance of a minimum CRAR of 10% on a continuous basis. The co-operative banks also needs to have net NPAs of less than 10% and should have made a profit in the preceding year.