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Economy

Ending the Teaser Game, Hiking Rates

ICICI and HDFC hike auto loan rates, end teaser loans for housing loans:

[The] country’s two leading private lenders ICICI Bank and HDFC Bank on Thursday raised lending rates for auto loans, in a clear signal that rates would harden in the coming days.

Mortgage major HDFC and ICICI Bank also discontinued with their special home loan schemes, which offer lower interest (teaser) rate for the first few years of the credit period. An HDFC spokesperson when contacted confirmed to PTI that the lender is not continuing with the special offer which was valid only up to 27 February.

Auto loans rates have been raised by 0.25-0.50% depending on segment and tenor with effect from March 5,” an ICICI Bank spokesperson said. With this hike, lending rates for new auto loans will now be in the 9.75-11% range.

HDFC Bank hiked auto loan rate by up to 100 basis points. Industry experts said that the rate hike was largely prompted by signals communicated by the Reserve Bank in its last monetary policy review on 29 January.

Remember, there was a CRR hike by the RBI, by 0.75% which is now fully effective.

But see how the banks respond – to a change in CRR, there’s an instant increase in the loan rates. But when rates were falling, there was little or no response to cut rates – the only things done were two year teasers, which are not, in any sense of the phrase, rate cuts. And they have also said the “teaser rates” can’t be extended to existing customers:

Amid a debate over teaser rates, bankers are believed to have turned down the Reserve Bank of India’s (RBI) suggestion to extend the cheaper home loans to existing customers saying that the move will impact their bottom lines.

No wonder the RBI wants to give more licenses – there must be stronger, harder competition to make sure banks are incentivised to be more customer oriented. Now if they only banned pre-payment penalties completely…

Food inflation came in at 17.87% today; the RBI is likely to have another rate increase in April. Rate increases aren’t one-off events – the rates will keep going up, first causing and then reversing the course of inflation. RBI rate transmission to general economy is dormant on the downside (when they reduce rates), it’s marginally more effective on the upside (when they raise rates), because of the reason I mentioned earlier – banks are eager to transmit raised rates instantly but do not give the benefit of lower rates. The quoted excuse is that their old deposits were booked at higher rates so they can’t reduce rates easily; but when rates go up their depositors immediately withdraw the lower rate deposits and rebook at higher rates. (That falls flat – deposit rates go up MUCH later than lending rates.)

If rate increases continue – and they look like they will – it will hurt borrowers. That will definitely hurt the real estate market, for one. Car buyers will already be looking at a higher price tag from the excise duty hike, and higher loan rates should stunt the market some more in the coming months. The question though is: at what point will the system be exposed to a large number of defaults?