Retail loans may get cheaper on push from finance ministry, banks

With the rate of inflation falling analysts are projecting a corresponding drop in rate of interest on retail credit for homes, auto and personal loans to its lowest. The finance ministry, the Reserve Bank of India (RBI) and the Indian Banks Association (IBA) are working out plans to lower interest rates further.

It is expected that low rates of interest would spur demand for housing and other sectors like automobiles. It would also extend support to increasing consumption on declining demand in general.

The rate of interest on home loans was between 9.25 per cent and 12 per cent at the end of September 2008. With a combination of rate cuts by RBI and depressed demand the rate dropped to 8 to 11 per cent. The interest on home loans was 7.75 per cent in 2006. These are floating rates while fixed rates are usually 1-1.5 percentage points on the higher side.

According to the finance ministry, which has done a comparative analysis of loan rates over the last three years, interest rates are already quite low and another 100 to 150 basis points cut would depress the rates to the lowest in the recent past.

Present prevailing prime lending rates (PLR) of most banks are in the range of 11.5 per cent and 12.5 per cent; this was between 10.25 per cent and 11.50 per cent as on April 1, 2006.

The fresh rate cuts would be applicable to existing and the new borrowers, as a PLR cut would warrant a corresponding reduction in rate of interest on loans linked to it.