Pay more for long-term loans

If you are planning to purchase new house or new car then stay, think and review your budget before taking any decision because most of the banks are planning to hike the Prime Lending Rate (PLR), the interest rate- banks charge to lend on the long-term debts.

This is all because Reserve Bank of India had hiked the Cash Reserve Ratio (CRR), the slice of cash that banks deposit to Central Bank from customers’ deposit, and Repo Rate, the interest rate banks pay to apex bank in borrowing, by 0.50%. This move of RBI would suck nearby Rs.20,000-crore from the market and banks will face liquidity crisis.

To rein the spiralling inflation that is affecting the common men bitterly, RBI had taken the move of raising the CRR and repo rate. According to the Wholesale Price Index (WPI) report, the inflation rate had reached to the 13-year high on 11.05% for the week ended for June 06, 2008 as against a fortnight reports of 8.75% for the week ended for May 30, when the price hike of crude oil was not included in WPI report.

The latest WPI data have broken the previous week’s record and has registered the inflation rate at 11.42% for the week ended on June 13.

Initiating the move to cut the impact of hiking CRR and repo rate, the premier public sector bank State Bank of India (SBI) and Kolkata based Union Bank of India (UBI), on Thursday announced to hike the PLR rate by 50 bps. This move of SBI has indicated to other banks to hike the interest rate on lending.

However, other major public sector banks like Bank of India, Canara Bank and Bank of Baroda has still been adopting the ‘wait and watch strategy’ and reviewing the condition of market. It is also possible that some of the major PSU banks can hike the PLR rate before July 01, when RBI will review credit policy.

Other banks like Punjab National Bank and Kotak Mahindra have announced to convene the meeting of their panels on Friday and Monday respectively to discuss the issue of interest on short-term loans, long-term loans and deposits.

In the private sector banks, HDFC has already increased the interest rate on long-term loans before RBI’s announcement by 25 basis points, and also announced to review it further while ICICI, India’s largest private sector bank has also announced to review the PLR.

After raising the PLR, the interest rate on home loans of SBI has reached to 12.75% with immediate effect while UBI’s interest rate on long tenure loans would be 13.25% from July 01.

But UBI has also raised the deposit rates by 25-100 bps and since July 01, it will offer 7.5% interest rate for more than 180 days but less than one year, for the period of 399-days deposits and above 400 days deposits it will award 8.75% while for 400-days term deposit, the interest rate has unchanged and continue to pay at 9%.

On the other hand, SBI has not hiked the deposit rate as it had hiked it a month ago but as the SBI official said, “If the need arises, we may revise rates.”

The escalating of PLR rate by 0.5% would hike the EMI of home loan by 4% and it will translate into Rs.34 a month per one lakh.

On auto loans, for instance, a debt of Rs. 5 lakh for 5 year tenure would cost an addition of Rs.126 per month while for the corporate loans of Rs. 1 crore credit, it will increase to Rs.4, 800 per month.

In consumer durables product which loan period is short term would affect more sharply.

Following the path of SBI, small banks may also hike the PLR rate but that rate would be more ranged between 0.50 to 1.00% as they will affect badly from RBI’s recent announcement of hiking rates.