Banks may not be able to ease the burden of borrowers any time soon. Several bankers have told Business Line that making EMI (equated monthly instalment) less painful is not possible in the present cost and margin structure.

Left with little scope to tinker with interest rates, banks are looking to extend the tenure of repayment to make EMIs ‘affordable’ .

“Stretching the repayment tenure to ease the EMI burden is an option. But we have to be careful and do it in a way that it does not amount to restructuring. We can also lower cost of deposits and pass on the benefit to customers,” said D. Sarkar, Chairman and Managing Director, Union Bank of India.

According to bankers, reducing lending rates below the current levels is unviable without resorting to deposit rate cuts.

Extension of tenure

The choice of loan tenure extension can be offered to existing customers, say bankers. At present, the average repayment period for housing loans is 15-20 years, and for auto loan, three-to-five years. Banks are now looking at offering longer tenures — 25 years for home loans, and 6-7 years for auto loans.

“We have started working on a scheme which will help make instalments small, effective and easily payable. We are looking at the possibility of extending the time period of repayment, particularly in the case of auto and other consumer loans,” T. M. Bhasin, Chairman and Managing Director, Indian Bank, said.

Higher outgo

However, a borrower must remember that stretching the time period of a loan also leads to higher outgo (interest component for the extended time period) on the loan amount.

“Though extension in tenure will release some pressure off the borrower immediately, he will end up paying more at the end of his loan tenure as the interest rates remains the same,” said K. R. Kamath, Chairman and Managing Director, Punjab National Bank.

shobha.roy@thehindu.co.in

(This article was published on September 10, 2012)
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