Not Yet Home

Updated: Mar 25 2004, 05:30am hrs
Bankers and housing finance companies, especially HDFC and Life Insurance Corporation, have been signalling a bottoming out of interest rates since October 2003.

At that time, the more aggressive lenders had dismissed this as a bogey raised by those who couldnt face the heat.

Although a couple of banks did hike rates marginally, interest rates, especially for housing finance, have been pushed further downwards by an intensely competitive market and are now nudging 7.25 per cent.

Rising inflation and the hardening of global interest rates signalled by the central banks of England and Australia ought to have caused some reassessment of interest rate trends.

Yet, opinion remains divided. Many top bankers are on record saying that Indian interest rates will have to continue moving south to align with global trends, while business leaders such as Deepak Parekh are emphatic that they have reached rock bottom.

The moot question, from the borrowers perspective, is whether interest rates will rise over the next few months or remain at existing levels for the present.

The broad consensus is that interest rates are unlikely to rise in the near future and the big difference between global interest rates and ours will ensure a continued bias towards softer rates.

That is why banks continue to be reluctant to give fixed rate loans, especially beyond five years. The fact that inflation has been contained over the last few days supports this view.

Moreover, so long as there is surplus liquidity in the system and banks remain reluctant to lend to industry, they will be forced to keep rates flat in order to be able to compete for the safer but narrow personal finance market.

Notice how the bankers claim that there is no significant increase in credit offtake even in an economy that is apparently growing at eight per cent

That is because the larger companies dont need their money and they refuse to risk lending to smaller enterprises that remain starved of finance.

On the personal finance front also, nationalised banks, which do not have access to funds of varying longer time maturity, are hard pressed to maintain spreads in a highly competitive market.

Margins on home loans have flattened until they are wafer thin. And many banks feel that the present rates of 7 to 7.5 per cent (at the lowest level) are not sustainable, when their cost of deposits is approximately 5.8 per cent and administrative costs alone gobble up half that amount.

Banks are particularly handicapped in the competition because both housing finance and big ticket infrastructure funding requires long-term money (typically 10 year funds), and they have access only to short-term funds.

However, the Reserve Bank is planning to come to their rescue by permitting banks to float long-term bonds in order to avoid an asset-liability mismatch.

This will not only enhance their competitive ability but will reinforce the downward bias in interest rates, rather than signal a hike.