WITH THE ENTRY OF PRIVATE BANKS LIKE ICICI AND HDFC, NEW CONCEPT OF FLOATING AND FIXED RATES HAVE COME TO STAY FOR HOME LOANS. EARLIER THERE WAS NO SUCH CONCEPT. WHEN A HOME LOAN IS TAKEN IT IS FOR LONG TERM SAY FOR 10 YEARS OR MORE AND EARLIER THE RATE OF INTEREST ON ANY TERM LOAN NEVER USED TO CHANGE AS IT WAS AN AGREED RATE. IN SUCH EARLIER CONCEPT WAS REASONABLE AS BANKS WOULD HAVE DISBURSED THE AMOUNT IN BULK AT ONCE AND THERE AFTER ONLY REPAYMENTS WERE COMING BACK. WHATEVER MAY BE COST OF NEW FUNDS FOR BANKS THE OLD TERM LOANS WHERE AMOUNT WAS ALREADY DISBURSED INTEREST RATES NEVER USED TO BE CHANGED.
NOW, WITH MARKETING TECHNIQUES AND INCREASE IN SALARIED CLASS BANKS SMELT THE RAT TO INCREASE THEIR PROFITS BY INTRODUCING NEW CONCEPT OF FLOATING AND FIXED RATES. EVEN A SMALL CHANGE IN REPO RATES OR CRR, BANKS ARE INCREASING RATE OF INTEREST NOT ONLY FOR NEW LOANS BUT ALSO FOR OLD LOANS. IF I AM CORRECT, INCREASE IN CRR IS APPLICABLE TO INCREMENTAL DEPOSITS ONLY AND REPO RATE IS APPLICABLE ONLY WHEN BANKS BORROW FROM RBI. RBI HAS INTRODUCED ASSET LIABILITY MANAGEMENT TO SEE THAT LONG TERM LIABILITIES ONLY ARE USED FOR CREATING LOAN TERM ASSETS. THIS CONCEPT HAS BEEN THROWN TO WINDS BY BANKS AND RBI IS BOTHERED ABOUT THE SAME. THE PRESENT SITUATION IS BECAUSE BANKS ARE FINANCING LONG TERM ASSETS FROM SHORT TERM LIABILITIES HENCE RATE OF INTEREST ON EXISTING LOAN ACCOUNTS IS ALSO INCREASED.
RE:HOME LOAN INTEREST RATES
by SID Roopsingh on Jul 03, 2008 02:26 PM Permalink
Earlier RBI fixed the interest rate and the rate would be common across all banks. Later RBI allowed banks to fix the interest rates as per their cost of funds. In the present scenario, you cant create long term liabilities and you need to be careful about long term assets. Asset Liability Management system is used for protecting the overall health of the bank and interests of the depositors. To finance the long term assets, you can not create long term liabilities.
