RBI Cuts SLR – Cheers for New & Tears for Existing Home Loan Customers

RBI’s 1st quarter review of monetary policy on July 31, 2012 bring cheers for New Home Loan Customers and Tears for existing customers. RBI kept Key policy rates unchanged but RBI cuts SLR (Statutory Liquidity Ratio) by 1% from existing 24% to 23%. SLR is % of bank deposits to be compulsorily invested in Govt Bonds or other approved Treasury Bills. Cut in SLR implies that now banks have to keep 1% less amount in Govt Bonds / Treasury Bills thus increasing the cash in hand for lending (Increased Liquidity in the Market).

As per rough estimate, it will release approx 64,000 Crore in the system & out of this pie, SBI alone gets 10,000 Crore. SBI has decided to use these funds for Home Loan & Auto Loan (SBI’s auto loan are cheapest in market @ 10.75%). Next question coming to ur mind will be why SBI is using this money for lending and answer is, If this excess liquidity of 10k crore is not utilized for lending then it will not give any returns to SBI whereas it was yielding 7.5% in Govt Bonds. Home Loan is most secured lending and now Bank can earn almost 2.9% more interest on this money becoz the yield of Govt Bonds are only 7.5% and by lending this money for Home Loan, SBI can earn upto 10.4%.

Immediately after RBI’s announcement instead of passing benefit to existing Home Loan Customers by reducing Base Rate,  SBI cut interest rate of all New Home Loan by reducing mark up on Base rate to 0.25% for loans upto 30 Lacs and 0.4% for all loans above 30 Lacs. What it implies is that now, New Home Loan Customers can get Home Loan from SBI @ 10.25% (For loans upto 30 Lacs) and @ 10.4% (For loans above 30 Lacs). Existing customers can also shift to new interest rates but only after paying 1% conversion fees on outstanding loan.

I was watching the interview of SBI CMD on one of Business Channels and when he was asked why SBI has not reduced Base rate, which will benefit existing customers also then he mentioned that Base Rate depends on Cost of Funds and other factors influencing economy but RBI’s decision to cut SLR will not reduce the Cost of Funds & will only bring liquidity in the system therefore it is decided to cut the interest rates for new customers.

Infact, to justify the move of not reducing Base Rate an example was quoted by one of eminent CMD that “Assume sometime back Person A has bought ipad for 50k and now same ipad is available for 20k therefore person A cannot claim that now company should refund me 30k”…Through this e.g. it was hinted that existing customers don’t have any right to ask for lower interest rates which clearly shows arrogance, while dealing with existing customers. This is very ill conceived example becoz bank is not the Fund Creator but only a Service Provide. Bank is mobilizing deposits and redeploying the same for lending thus earning commission in between. Bank has to remove inefficiencies by way of frequently redeploying the deposits mobilized by bank.

Bank can mobilize deposits under 2 category (a) Floating Deposits and (b) Fixed Deposits. Floating deposit mean that interest on deposit will follow the movement of market interest rate. All funds mobilized under floating deposit should be deployed for Floating Loans and funds mobilized under Fixed deposits should be deployed for Fixed Interest rates. It will bring more transparency and efficiency in the system…All customer who are depositing or borrowing will make informed choice. Lets take an e.g., Assume in past if a customer has opted for FD @ 6.5% interest rate when interest rates were low. Bank used the same  money to lend for Home Loan @ 8.5% but now Home Loan Borrower is paying 11% interest becoz interest rates have increased but customer from whose FD the money was used by bank for lending is still getting only 6.5% therefore now bank is making cool profit of 4.5% instead of 2%. My question is why not bank increase the interest rate of customer’s FD  to 9% and retain the margin of 2% (Margin at the time of Borrowing and Lending). Bank’s only objective is to make money at cost of Existing Home Loan Customers.

All Business Channels have anticipated that shortly there will be drop in deposit rates. Last time also when RBI cut CRR, SBI revised deposit rates but till date all banks including SBI are averse to reduce Base rate. Going by a simple logic, if reduction of SLR has infused 64k Crore in the system then it implies that Banks can now redeploy these funds, which were yielding 7.5% interest in Govt Bonds and bank can now get upto 10.5% on these funds. In other words, Banks can consider that they are mobilizing 64k Cr @ 7.5% (Which is only opportunity loss).

From banks perspective, only objective is to corner Home Loan market share by reducing interest rates only for New Customers & existing customers are left in lurch to suffer.

RBI & National Housing Banks have given clear cut guidelines that all customers should be treated equally but unfortunately these are only guidelines but not directions therefore not binding on banks or HFC’s.

Almost 80% of Homes in India are bought by availaing Home Loan & its time to protect the interests of million of Existing Home Loan Borrowers by correcting this wrong practice.

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