The Reserve Bank of India has been making downward adjustments to some of its critical policy rates since September 2008 to try and counter the recession ripples sent across the country due to the downturn of the global economy.
In a recent move it made further cuts to its repo and reverse repo rates by 25 basis points. The repo rate is the interest rate at which RBI lends money to the banks whenever they need to borrow funds.
When the repo rate decreases it is good news for the banks as they can avail more funds at a lower interest rate. The reverse repo rate on the other hand is the interest rate at which RBI borrows funds from the banks.
Public sector banks have already set the pace for rate cuts bringing down interest rates, over the past few months. Private banks have followed suit bringing down interest rates a few notches for new customers.
However, only after this most recent announcement have the benefits truly been extended to existing borrowers also, which means the BPLR rates are being revised slowly but surely.
RBI has cut its repo rate by 425 basis points and reverse repo rate by 275 basis points since September 2008. Responding to these cuts, PSBs have cut lending rates by 125-225 basis points and deposit rates by 125-250 basis points in the time period spanning September 2008-April 2009.
In the light of the most recent RBI move, a leading private bank has also cut its BPLR rate by 50 basis points, which is now at 16.25%, however it is still much higher than the current PSBs' rates which are at a BPLR of around 11.50% and 13.50% as on April 24, 2009.
Floating interest rates that had been hovering around 14% are now to the tune of around 9%-10%, with some banks bringing it down to a fixed rate of around 8%-9% for the initial year.
Time and again RBI has urged banks to rethink their BPLR to encourage lending and allow the train of money rotation to chug along at a peaceful pace.
Benchmark Prime Lending Rates (BPLR) is a reference interest rate used by Banks as a benchmark to determine the interest rate passed on to the customer. Banks have the freedom to set these rates and the lending rate to the customers is usually 'x%' plus or 'x%' minus of this BPLR. BPLR is influenced by a host of factors including CRR, repo rate, reverse repo rate etc.
The fact that RBI has been on a cutting spree of its key policy rates is a clear indication for banks to bring their BPLR down by several notches and improve the lending scenario. The idea is to bring in liquidity and ensure money does not form stagnant pools, which can be no good for the economy.
In fact, the RBI has proposed to set up a team to review the current BPLR trends prevalent with various banks. Interest rate forecasts have predicted that the lending rates will stabilise at around 8% for the entire loan tenure like how it was in the year 2004.
The realty market mood
Apart from the fact that RBI needs to revive the struggling economy, real estate is a significant stand alone aspect that is related to easing up the lending scenario.
When the going was good, rather incredible, with unrealistic prices skyrocketing beyond the grasp of common man, builders brought huge land banks, investing a great deal of money. However, it all came crashing down in recent months bringing construction projects to a stand still.
Price of raw materials also shot up leaving the builders in a lurch unable to complete projects and left them with the feeling that they had bitten off more than they could chew.
On the other hand there was a spate of cost cutting, lay offs, etc. particularly in the IT sector. All these factors led to increasing home loan defaults, strained relations between the buyers and builders who could not keep their word, banks tightening their lending norms, people shelving plans to invest in a home etc.
A wait and watch policy was adopted by everyone involved, the banks, the buyers and the builders. At one point in time, both the banks and builders were not willing to make the required adjustments to either lending rates or property prices respectively and neither was the buyer in any mood to humour either the bank or the builder.
Time for change?
RBI hopes to be the stabilising factor trying to strike a balance and helping everyone to their feet to go about business as usual. These spate of rate cuts are expected to ease up the lending norms of banks, however builders realize that lending rate cuts alone will not nudge the buyer to invest in a home.
Although property prices are sliding in the favour of the buyer it still needs to come down further to be able to tempt the buyer, especially when everyone is keen to top up their emergency fund rather than invest in a home loan.
However, the right circumstances where bank lending rates, property prices, job security etc. become a shade or two brighter should provide the platform for the first time home buyer to make his move, after all everyone has a need to own a home! It is considered one of the basic comforts in the Maslow's hierarchy of needs.
The most recent RBI effort could be the final push that would allow enough and more room for banks, builders and buyers to start moving towards change.
The author is Head of Content & Research at BankBazaar.com
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