The Hindu Business Line : Costlier loans

DAMPENING THE DEEPAVALI mood, the HDFC chairman, Mr Deepak Parekh, has made housing loans costlier by half a percentage point and other lenders are sure to follow suit in the coming weeks. This ends the furious two years of chipping and chopping of interest rates by financial entities on housing and consumer loans to lure customers. Surely this helped as housing did spur economic activity in other sectors, but the price of home loans had dipped in one instance to as low as 6.5 per cent raising eyebrows over the quality of assets loaded on to the balance-sheets.

Usually, it takes about three years for housing loans to turn sour and the Reserve Bank of India wisely decided to act by telling banks to set aside more funds from profits against these and consumer advances. For housing companies such as HDFC, which were banking on fund flows from the market, the days of cheap money seem to be over with yields tailing the rising inflation rate. Home loans had to become less cheap, though borrowers tied to floating rates should not be whining as not always do interest rates fall. Better placed are government and private banks that are sitting on cheap deposits; their home loan rates should not be moving up and, hence, provide an alternative to customers. Housing and other loans were way below the prime lending rates of banks and there are many who think the days of sub-PLR advances to corporates could be nearing an end with financial markets holding less free cash. Around Rs 50,000 crore is held by the RBI under various schemes, and the cash impounded against government paper under the Market Stabilisation Scheme could flow back on redemption to ease the scarcity. Dollars are still coming and the RBI need not mop up the counterpart rupee funds under the MSS to keep down yields.

With interest rates on corporate paper linked to government paper, companies may at some point of time revert to their credit lines with banks. As of date, the lending rates on demand and term loans (where maximum business is done) of public sector banks are in the profitable range of 10.50-12.75 per cent making an upward adjustment unnecessary. A casualty could be the government borrowing programme though some amends can be made by the government opting for floating interest bonds. Indeed, the case for a systemic rise in the price of money is thin and the RBI could crush any such tendency if it agrees to part with around $5 billion of the forex reserves for infrastructure funding. The RBI can sell the dollars to banks at rates slightly above Libor for funding corporates keen on raising foreign monies; as an alternative, the central bank could desist from absorbing dollars flowing into the markets under the MSS to enhance the supply of rupee funds. Nothing is still lost as world prices of crude have fallen to $45 per barrel and that too ahead of the winter months when demand in the West climbs.

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