Borrowers make merry in 2009

I / New Delhi December 30, 2009, 15:57 IST

2009 was mostly bad news for countries, governments and individuals in terms of economic prosperity, but the year was the best in many years for borrowers as interest rates eased.

Much to the delight of borrowers, home and car loan rates came down to as low as 8 per cent, the lowest in six years, during the year.

As early as February, 2009, the country's largest lender State Bank of India introduced special home loan scheme offering loans at eight per cent and by the end of the year, other big names such as HDFC and ICICI Bank had joined the rate war.

The winner, however, was the borrower.

Even car loan rates came down to 8 per cent from as high as 14 per cent in some cases. Those who were in the habit of saving, however, suffered a rude shock when peak deposit rates fell in a phased manner by 400-600 basis points.

As far as Reserve Bank's (RBI) policy rates were concerned, they remained at the lowest level as part of an effort to perk up economy.

The repo rate, the rate at which banks borrow from RBI in exchange of government bonds, was at 4.75 per cent, reverse-repo at which the apex bank accepts deposits from banks at 3.25 per cent and Cash Reserve Ratio, the portion of cash banks park with the Reserve Bank, at 5 per cent.

"The year 2009 was quite eventful for banks and it showed the resilience of the system to a huge crisis in related markets," Bank of Baroda chairman and managing director M D Mallya said.

"As we move ahead, when we shun the impact of slowdown, I expect the bank credit growth to revive considerably, which may result in upward movement of lending rates as well."

Moreover, galloping inflation is also putting pressure on the central bank to tighten monetary stance, which hitherto has been dovish.

A hike in cash reserve ratio, the percentage of amount banks should keep with RBI, will help to mop up the excess liquidity, after which RBI could start raising repo rate and reverse repo rate to exit from the easy money regime, bankers said.

At present, there is enough liquidity in the system. RBI may actually start pumping out liquidity through a CRR hike by around 25-50 basis points in January, Jammu & Kashmir Bank chairman Haseeb Drabu said.

Such move by RBI would automatically signal hike in interest rates in the system.

Interestingly, the talks on consolidation in the public sector banks began during the year as the Finance Ministry held a discussion with leading PSU banks to explore the possibility of creating a few large banks through mergers and acquisitions.

Heads of five major PSU banks -- Punjab National Bank, Bank of Baroda, Canara Bank, Union Bank of India and Bank of India -- attended the meeting called by Additional Secretary G C Chaturvedi in November.

Bankers expect the consolidation talks in the Indian banking system to gain momentum in 2010 both in public and private sectors, as it is warranted by evolving competition in the global banking space.

In a bid to strengthen the banking system, RBI proposed to increase provision coverage for the banks to not less than 70 per cent by September 2010. Increase in provision coverage could dent profits (mainly for SBI and ICICI Bank) in the next three-four quarters, an analyst said.

At the same time, a Reserve Bank panel recommended that loans should be given at interest rates that are linked to a defined minimum base rate instead of the present benchmark prime lending rate (BPLR) to ensure transparency.

Linking lending rates to base rate would address the concerns relating to growing sub-BPLR portfolio of banks, the RBI had said.

Under the proposed mechanism, all banks will be required to declare a base rate and charge interest rates over that depending upon the credit profile of the borrower and repayment period.