Earn less, pay more
After months of expectations that a rate cut was on the anvil, the Reserve Bank of India (RBI) finally took the plunge last week by cutting the repo rate by 50 basis points — quite a pleasant surprise for the market.
However, the rate cuts that followed have not been too convincing. Some banks have cut deposit rates across tenures, while certain others have chosen to cut the base rate — implying there will be some relief on the lending front as well.
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For the ones who have not locked their money into high deposit rates, there would be disappointment after the rate cut. With banks cutting rates between 10-50 basis points across tenures, the rate of return would go down to that extent.
|Bank of Maharashtra||10|
|Union Bank of India||15|
|United Bank of India||15|
For instance, the largest private sector lenders, ICICI Bank and Punjab National Bank, reduced their base rates by 25 basis points. Others that followed were Bank of Baroda, Bank of Maharashtra, IDBI Bank, Union Bank of India, Allahabad Bank, United Bank of India, Kotak Mahindra Bank and Deutsche Bank. Deposit rate cuts by many of these were between 10 and 50 basis points.
No doubt, there would be relief on equated monthly instalments (EMI) as banks reduce the base rates for existing borrowers. And, for new borrowers, it means entering at a slightly lower rate. However, before jumping to borrow for that new house or car, remember there will be processing and administrative fees that might reduce the advantage you would get due to the rate cut.
For example, if you are borrowing Rs 30 lakh at 10.5 per cent for 15 years, the EMI would work out to Rs 33,162. The new rates, which are down by 25 basis points, would reduce the EMI to Rs 32,699, a saving of Rs 463. However, this is the EMI for the new customers. The change in EMI will depend on when you took the loan.
In some cases, the deposit rate cut has been notified separately compared to the base rate cut. That is where earnings vis-a-vis spending on EMIs will be impacted. That is, IDBI Bank cut its base rate by 25 basis points to 10.5 per cent, while it reduced the term deposit rates by 10-50 basis points, across maturities. So, while you will earn 50 basis points less in certain tenures, your loan liability will fall only 25 basis points. So, you pay more (on loans) but earn less (on deposits).
R K Bansal, executive director (retail banking), IDBI Bank, puts the cuts in base rate and deposit rate in perspective. “One may think the slash in base rate is not as much as it is in deposit rates, but one should understand deposit rates have been cut differently across different maturities," he says. For instance, 80 to 90 per cent of deposits are for a year, and the average deposit rate cut there would be around 25 basis points, quite in sync with the slashed base rates of the banks concerned.
Jayant Pai, vice-president at Parag Parikh Financial Advisory Services, says the slashed deposit rates will be applicable only for new customers. So, there is no reason for existing deposit holders to worry. “But when your deposit is due for renewal, one should re-look at the deposit rates of the existing bank or simply switch to a bank giving better rates," he notes. “Banks will not reduce the interest on deposits abruptly, but customers should always be alert about their investments."
However, most agree the rate cycle has just started changing. And, benefits will take time to be passed on to customers. If there are more rate cuts, customers can expect some serious relief on their borrowing costs. But, remember, it will also be accompanied by cuts in deposit rates. That is where the investor will need to start looking at more lucrative forms of investment.