The Hindu Business Line : Thanks to cheap credit, you can live life king-size

INTEREST rates on specific advances have become so attractive as to woo even the most tough customers. "With the interest rates plunging to 5.75 per cent, I have upgraded my car to an Opel Corsa," said Mr R. Krishnan, an executive with an insurance company.

He had bargained hard with two leading new generation private sector banks to clinch the rock-bottom deal.

Mr Krishnan has locked away his life savings in banks and post office fixed deposits, earning interest rates ranging between 7 per cent and 8 per cent.

From the rate differentials between his investment and borrowings, he is earning close to Rs 1,000 per month.

"As the inflationary spiral has just crossed the return on bank deposits in several instances, the middle class has begun to borrow more and spend more," said Mr K.P. Padmakumar, Chairman of Federal Bank.

"With inflation rates ballooning out to 5.9 per cent, the longer you delay in availing yourself of the zero interest consumer loans, the 5.75 per cent automobile loans or the 7.5 per cent housing loans, the more money you are losing every day. As inflation goes up, the value and purchasing power of your money keeps coming down," said Mr Babu Kallivayalil, a practising Chartered Accountant.

The case is not much different even in the case of housing loans.

"With a 30 per cent built-in income-tax savings on my interest expenditure, my real effective interest burden would be less than 5 per cent per year. When the inflation rate is also factored in, the real effective interest burden would virtually be zero," Mr Kallivayalil said.

Thanks to the plummeting interest rates both the housing and automobile sectors in the country have been booming.Several consumer durables and automobiles companies have been coming out with their own channel of financing, passing some of the dealers' margins and subsidising the consumers' interest burden handsomely.

"But it has not affected our credit portfolio. The big companies always come back to the banks and financial institutions to shore up the working capital requirements," said Mr A. Sethumadhavan, Chairman of South Indian Bank.

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