The Hindu Business Line : Retail loan rates may not fall

Despite the growing competition in the retail sector and ample liquidity in the system, bankers do not see much scope for further reduction in rates. With oil price and inflation expected to rise, the rate of interest could only move up, they say.

Mr V. Vaidyanathan, Head Retail Banking, ICICI Bank, one of the largest players in the field, said interest rates have been on a downward curve for quite some time now. Rates have declined by about 150-200 basis points across all businesses including retail loans over the past one year. However, this downward trend has now stabilised, and the interest rates have been stable for 3-4 months now. There is ample liquidity in the market. Banks have parked about Rs 60,000 crore with the RBI under Liquidity Adjustment Facility at last count, said Mr Vaidyanathan.

Retail disbursements of ICICI Bank grew by 66.67 per cent to Rs 30,000 crore last fiscal from Rs 18,000 crore in the previous year.

Since April 2000, housing loan rates have fallen by about 675 bps, which is more than the 582 bps decline in the benchmark 10-year government bonds. Interest rates on car loans hit an all-time low of 7 per cent in December 2003 and fuelled volumes sharply during April to December last year.

Car dealers say that the reduction in car loan rates has been to the tune of 100 to 150 basis points in the past year. Housing loan rates are at a low 7.5 per cent for a loan above Rs 5 lakhs for tenure of 20 years.

Rates in the retail sector vary according to product, tenor and amount. While at the lower end the average rates now are at 7.5-8 per cent (on home loans), it is as high as 15 to 20 per cent (on personal loans), said a banker.

Mr S. Ramakrishnan, Vice-President, Head Retail Assets Group, HDFC Bank, said: " There is not much scope for reduction of retail lending rates in the near term of about three to six months because they are already at an attractive low level."

However, Mr Ramakrishnan said rates would also depend on overall market conditions. Retail assets of HDFC have grown by 112.9 per cent to Rs 7,325 crore in the last fiscal.

With increasing competition, interest rates have been under pressure for sometime now. But if the current economic and political indications — hike in oil prices, inflation and Left parties' views — are anything to go by, soft interest regime is unlikely to continue, said Mr George John, General Manager (Credit), Federal Bank Ltd. The rates could only go up, may be after six months, Mr John said.

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