Monday, 17 October 2011
Important Details of your Credit Policy
Have you often found yourself baffled with esoteric terms used in your credit policy? These are the words like cash reserve ratio (CRR), reverse repo rates, increased provisioning etc. Not all loan takers are able to understand the impact of such policy measures on the rate at which they get their housing loan. The articled sheds considerable light on the mechanism by which the monetary policies drafted by the central bank impact you.
Recently, the Reserve Bank of India has laid new provisions regarding home loan interest rates in its newly drafted credit policy, which talks about an increase in CRR. Encouraged by the same, most banks began increasing the prime lending rate (PLR) on loans of one type or another. A hike in PLR affects rates on loans. Let's see what the measures mean for the loan buyer.
Hike in CRR and its impact
CRR is an acronym used for cash reserve ratio, which is the percentage of bank reserves to deposits and notes with the RBI as stipulated by the section 42(1) of the RBI Act 1934. An increase in CRR limits liquidity by bringing a decrease in number of resources for banks to lend out of every rupee deposit they accept. RBI hikes the CRR with an aim to siphon out the excess liquidity in the banking system.
However, the question remains whether an increase in CRR be translated into a rate hike or not? As per the general perception, a smaller pool of money is usually chased by the same number of loan borrowers, which increases interest rates. But banking analysts opine contrary to the belief and believe that a hike in CRR may not necessarily push up interest rates immediately.
Even banks prefer to invest more with the RBI as reserves; the banking system may witness surplus liquidity for a short period. For that reason, banks don't have the choice to add to interest rates unless the demand for credit shoots up to an extent that all the money is lent out.
Repo & Reverse Repo Rates
The reverse repo rate is the return banks earn on excess funds invested with the central bank against Government securities. These rates set the floor and ceiling for risk-free overnight borrowing and lending.
Indian Home Loans given have to be done by increasing the risk premium which largely depends on the borrower's credit rating. Such rates hold importance as they set the direction for other lending rates. A hike in the reverse repo rate translates into a high cost of borrowing for common loan buyers. If banks are earning good percentage by lending risk free to RBI, they can certainly increase their profit percent by lending to others.
Recently, the Reserve Bank of India has laid new provisions regarding home loan interest rates in its newly drafted credit policy, which talks about an increase in CRR. Encouraged by the same, most banks began increasing the prime lending rate (PLR) on loans of one type or another. A hike in PLR affects rates on loans. Let's see what the measures mean for the loan buyer.
Hike in CRR and its impact
CRR is an acronym used for cash reserve ratio, which is the percentage of bank reserves to deposits and notes with the RBI as stipulated by the section 42(1) of the RBI Act 1934. An increase in CRR limits liquidity by bringing a decrease in number of resources for banks to lend out of every rupee deposit they accept. RBI hikes the CRR with an aim to siphon out the excess liquidity in the banking system.
However, the question remains whether an increase in CRR be translated into a rate hike or not? As per the general perception, a smaller pool of money is usually chased by the same number of loan borrowers, which increases interest rates. But banking analysts opine contrary to the belief and believe that a hike in CRR may not necessarily push up interest rates immediately.
Even banks prefer to invest more with the RBI as reserves; the banking system may witness surplus liquidity for a short period. For that reason, banks don't have the choice to add to interest rates unless the demand for credit shoots up to an extent that all the money is lent out.
Repo & Reverse Repo Rates
The reverse repo rate is the return banks earn on excess funds invested with the central bank against Government securities. These rates set the floor and ceiling for risk-free overnight borrowing and lending.
Indian Home Loans given have to be done by increasing the risk premium which largely depends on the borrower's credit rating. Such rates hold importance as they set the direction for other lending rates. A hike in the reverse repo rate translates into a high cost of borrowing for common loan buyers. If banks are earning good percentage by lending risk free to RBI, they can certainly increase their profit percent by lending to others. 
