Confused why your Home Loan EMIs will not be so cheap despite the Banks cutting rates? We tell you why!

The banks have slashed their interest rates and the loans are all set to become ‘cheap’. But how cheap can these loans get? On an average, the banks have slashed rates up to 25 basis points, with just a handful of them slashing rates up to 40 basis points. But can a meager 0.25% to 0.40% reduction in interest rates really lower our EMIs especially, when the RBI reduced its lending rates by a total of 1.25% in the current year? If you are confused with why banks did not make your loans cheaper significantly, allow us to explain!

“Everything depended on a few big banks like the SBI, ICICI and HDFC Bank. Once they slashed rates, other banks followed suit,” said Naveen Kukreja, managing director of PaisaBazaar.com, a comparative website for loans by Policy Bazaar.

Speculations were rife that banks will cut their interest rates only by 30 basis points from the miniscule 15 basis points that were slashed last month.

And it did happen that way. While public sector bank such as SBI, Punjab National Bank (PNB), Bank of Baroda have reduced their interest rates by 40 basis points or 0.4%, private sector banks such as HDFC Bank, Yes Bank, Standard Chartered Bank, Kotak Mahindra Bank have slashed their base rates by only 25 basis points.

The meager cut in the interest rates can be attributed to the fact that banks have been recording higher NPAs in their corporate portfolio since the past few years. In fact, there has been a rapid spike in the NPAs because banks have pro-actively offered long term restructuring of loans under RBI’s 5:25 scheme, which was originally meant to remove bottlenecks while financing infrastructure projects.

As far as public sector banks are concerned, SBI has led the race following the RBI’s announcement. This doesn’t come as a surprise as SBI is the largest public-sector bank in the country. Other public sector banks followed suit, primarily because of two reasons – they are public sector banks and secondly, the government has approved of additional infusion of capital in these banks at the beginning of this year.

The government in February this year had announced a capital infusion of Rs 6990 crore in nine state run banks that included SBI (Rs 2,970 crore ), PNB (Rs 870 crore), Canara Bank (Rs 570 crore), Syndicate Bank (Rs 460 crore), Allahabad Bank (Rs 320 crore), Indian Bank (Rs 280 crore), Dena Bank (Rs 140 crore) and Andhra Bank (Rs 120 crore). The Centre announced another Rs 12,000 crore capital infusion into these state-owned banks in order to strengthen their balance sheets.

The nationalised banks that were excluded from the first round of this scheme include Central Bank of India, and other associate banks of SBI. These banks took a cue from the private sector banks and slashed their base rates by only 25 basis points. Allahabad bank seems to be an exception here as it also lowered its interest rates by only 25 basis points. The only logic behind it could be the fact that the bank has been trying to raise adequate capital for the current fiscal year and hence, could not see much room for a higher reduction in the interest rates.

However, the largest private sector bank in the country, ICICI Bank, has surprisingly slashed its base rates by 35 basis points. This was simply possible because the bank lowered the interest rates offered on its bulk deposits simultaneously. So, if you are disappointed with the new interest rates, remember! something is better than nothing, right?