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Indian banks are expected to have steady growth in earnings and returns over the next 3–4 years, according to a recent report by Jefferies. It expects a 13% compound annual growth rate (CAGR) in loan growth for banks between FY24 and FY27, helmed by a supportive environment and expected adjustments in interest rates. "We expect steady growth in earnings and stable returns, Over FY24-27, the banks we cover should see 13% CAGRin loans We factor 25-50 bps cut in rates, &amp; depending on timing, NIMs will move," the report said. Depending on the timing, these rate cuts could impact banks' <keyword id="20076541" type="General" weightage="20" keywordseo="net-interest-margins" source="keywords">net interest margins</keyword> (NIMs), which measure the difference between interest income generated and interest paid to depositors. The report also notes that banks' net interest income (NII), a critical metric that is reflective of how much a bank earns from its lending, could grow at a steady 12% CAGR, which would support overall earnings growth. <h2>Rate cuts probable next year</h2>Per SBI Mutual Fund's monthly outlook for November 2024, while markets were initially speculating possible rate reductions in December this year or February next year these chances now stand dampened due to two reasons. First, elevated CPI numbers in September, which stood at a nine-month high, underlined the stickiness of food inflation. Secondly, RBI governor Das recently highlighted his hawkish stance at a conference, stating that "rate cuts at this stage would be premature and risky’. The report further adds that February 2025, or even April, would be a better time to discuss repo rate cuts in India. Even <keyword id="19985925" type="General" weightage="20" keywordseo="bank-credit-growth" source="keywords">bank credit growth</keyword> has continued to outpace deposit growth for two years now. However, they seem to be inching closer in the recent past. For instance, in October 2024, while bank credit growth remained at 12.7%, the deposit growth rate followed closely at 11.8%. This also means that banks are witnessing an elevated bank credit-to-deposit ratio, standing at 77% in October. <h2>Risks in unsecured lending </h2>However, Jefferies noted some areas of caution that could influence growth in other revenue streams, particularly fees. Growth in fees may be at risk due to expected declines in the disbursal of unsecured loans, which generally carry higher interest rates and generate higher fees for banks. October saw stress and defaults rising in the unsecured lending space, prompting the RBI to intervene. As a result, unsecured loans by banks have only grown by 12.1%, the lowest since the pandemic. Despite these risks, the report expects banks' return on assets (ROA) and return on equity (ROE) to remain healthy, underscoring the sector's stable profitability potential. The report also highlights that while the Nifty Banks index has risen by 19% over the past year, it has still underperformed the broader Nifty index, which delivered 27% returns in the same period. BSE Bankex has been along similar lines, generating returns worth 19% over one year. While the Nifty banks' index has a YTD (yield to date) of 7.63%, it continues to trail Nifty's YTD of 11.30%

Indian banks to have steady growth in earning over next 3-4 years, fees from unsecured lending may dip, notes Jefferies report

The Indian <keyword id="22196321" type="General" weightage="20" keywordseo="credit-card-industry" source="keywords">credit card industry</keyword> is struggling to grow, as new issues slow down on a year-on-year (YoY) basis. Not only has the growth i.e. issuance of new credit cards slowed down, but lenders are also becoming increasingly cautious of the asset qualities, a recent report by Nomura showed. From 19% in July 2024, the growth in the <keyword id="6368202" type="General" weightage="20" keywordseo="credit-card" source="Orion">credit card</keyword> spendings came down to 13% in August 2024. The year-to-date (YTD) growth has also significantly declined in FY25, currently standing at 17%, markedly down from 28% in FY24. For the fifth consecutive month, the number of new credit cards added to the system remained well below the 1-million, or 10 lakh mark. Around 9.2 lakh credit cards were added during the month, a slight uptick from the 7.55 lakh cards that came into the system In July 2024. However, there is growth in this space nevertheless, with about 10.55 crore active credit cards at present, marking a 15.6% YoY increase. Even the annualised spend per card, or the average amount spent via an annual card during an year grew 1% YoY to Rs 1.87 lakh. But this was far less than the 7% growth annual spends via one credit card saw in FY24. Meanwhile, what continues to burgeon consistently is the outstanding amount on these credit cards, which ballooned to Rs 2.7 lakh crore in June 2024, up from Rs 2.6 lakh crore in March 2024, and around Rs 2 lakh crore in the year ago period. To put this in perspective, pre-pandemic, the total outstanding amount stood at Rs 87,686 crore, which marks a 24% CAGR in this amount, in just a span of 5 years. <h2>Large drops, slowdown to sustain</h2>Even the monthly expenditure per card dropped 2% YoY to Rs 16,000 in August, 2024. Subsequently, the transaction volume via credit cards also dipped to 1.6% in August, along with the total amount of <keyword id="21084888" type="General" weightage="100" keywordseo="credit-card-spending" source="keywords">credit card spending</keyword>, which fell to Rs 1.69 lakh crore in August, from Rs 1.73 lakh crore in July. Also, there has been a hefty cutdown in provisions made for credit card reward points, which reflects in the quantum of credit card benefits that have been mowed out by companies of late, making credit cards far less lucrative than before. <h2>HDFC takes lead </h2>During August 2024, <keyword id="19895995" type="General" weightage="20" keywordseo="HDFC-Bank" source="keywords" meta.keywordsubtype="org" meta.entityname="HDFC Bank" meta.hostid="261" meta.entityid="HDFC Bank">HDFC bank</keyword> added a total of 2.41 lakh credit cards, taking its total tally of active credit cards to 2.19 crore. <keyword id="19900482" type="General" weightage="20" keywordseo="ICICI-Bank" source="keywords" meta.keywordsubtype="org" meta.entityname="ICICI Bank" meta.hostid="261" meta.entityid="ICICI Bank">ICICI Bank</keyword> came a second distant, adding 1.45 lakh credit cards during the month, which means that the second-largest credit card issuer now holds over 1.75 crore active credit cards. Axis Bank and SBI Cards also added 1.27 lakh and 1.1 lakh cards, respectively to their repertoire during the month, while the growth numbers at Kotak Mahindra Bank remained largely flat, stagnating the bank's total card tally at 54.13 lakh. This was due to the ongoing ban on the bank due to its weak IT infrastructural issues imposed by RBI in April 2024. If anything, the bank's number of credit cards declined by 61,191 during the month. Even as the festive season approaches, experts think that it is unlikely to make a major dent in credit card spendings, which are expected to see a further slowdown in the quarters to come.

Credit card growth experiencing a slowdown, as borrowers struggle to pay back loans

On September 18, 2024, the US <keyword id="19900043" type="General" weightage="20" keywordseo="fed" source="keywords">Fed</keyword> delivered a jumbo-sized surprise to the global economy. Not only did they trim their interest rates by a massive 50 basis points to bring their yields down to 5%, but also hinted at further rate cuts in the upcoming months. This move from the fed and several other central banks globally had pushed expectations high for a similar rate slash closer home, from the <keyword id="19899808" type="General" weightage="20" keywordseo="rbi" source="keywords">RBI</keyword> this month. But governor <keyword id="19913110" type="General" weightage="20" keywordseo="shaktikanta-das" source="keywords">Shaktikanta Das</keyword>, in a “picture abhi baaki hai” moment, decided to hold the repo rates here steady, leaving them unchanged at 6.5% for the record 10th straight time. Although, he did tinker with the policy stand, changing it from “rate cuts are absolutely off the table” to a more accommodating “we’re okay with bringing down the rates, if needed”. This, rather neutral, stance from India’s financial custodian sparked hopes for a rate cut in December this year. However, the stubborn inflation levels in September have again dented such hopes. As consumers, you may be wondering what all the hullabaloo this is about, since it hardly makes a difference to your regular financial routine. Well, the majority of both economic growth and inflation is closely connected to this policy stance from the central bank and it does have a rather indirect effect on both our earnings and spending. But more directly, it would have clear implications for those looking to own a house. Even the slightest modification of interest rates, or the lack of it, influences the <keyword id="19916018" type="General" weightage="20" keywordseo="emi" source="keywords">EMI</keyword> you pay significantly. So, all aspiring homebuyers, is this the right time to take out a loan and buy a house? Can you expect a rate cut anytime soon, and what will that mean for your home-owning dreams? We lay it out. <h2>What’s the connection?</h2>You see, buying a house is no small feat, at least financially. The task becomes even more herculean if you are scouting for your own roof in cities like Delhi, Noida, Bangalore or Mumbai where, as Circuit from Munnabhai says, “room shuru hote hi khatam ho jata hai”. Naturally, you’ll have to take a <keyword id="6354730" type="General" weightage="100" keywordseo="home-loan" source="Orion">home loan</keyword> from the bank. Don’t be mistaken, the bank won't give you a loan that covers 100% of the value of the property you want to own. Rather, your loan amount will be equivalent to a certain percentage of the property’s total value. RBI’s guidelines on this are pretty clear: <ul><li>If your loan amount is up to Rs 30 lakh, you can get a loan worth 90% of the property’s value.</li></ul><ul><li>If the loan amount is between Rs 30 lakh and Rs 75 lakh, you are eligible for a loan worth 80% of the property’s value.</li><li>If you are taking a loan of more than Rs 75 lakh, your loan amount will be equivalent to 70% of the property’s value.</li></ul>Now assuming that you have the money, it's all about paying back the principal amount, but not without a little (read hefty) interest added on top. See, when you’re taking a home loan, you are actually signing up for a long-term, even multi-decadal financial commitment, which will unfailingly present itself to your bank accounts and finances every single month, in the form of EMIs, or equated monthly instalments). When you take a home loan, you can choose to pay the interest in two ways (talk about choices!). One is that you decide to keep a fixed rate of interest throughout the tenure of your home loan. So, if you opt for a 25-year fixed-rate home loan at the rate of 8.8% p.a., you’ll have to pay interest at this rate for the next 25 years, till your entire loan is paid off. Yes, you can go backsies and switch to a floating-rate home loan by paying a fee. Floating, as the name suggests, means that your interest rate is not set in stone. But starting October 2019, when it comes to a floating interest rate home loan, your payable interest and EMIs are directly impacted by any changes in <keyword id="20094323" type="General" weightage="20" keywordseo="repo-rate" source="keywords">repo rate</keyword>, which were left unchanged by RBI this time around. Why are these two so chummy, you might ask. Well, home loan interest rates are a sum of two things: <ol><li>Repo Rate (the rate at which RBI lends money to banks)</li><li>Operational cost + margins</li></ol>Any plus or minus in this equation would send your home loan interests tanking, or skyrocketing. Vivek Iyer, Partner, Grant Thornton Bharat explains that any change in the repo rates impacts the cost of funds and thereby the home loan interest rates. “When the interest rates are expected to reduce, the corresponding impact will be in the form of a reduced EMI. Home loan borrowers should always try to borrow at a floating rate when interest rates are expected to reduce and at a fixed rate when the interest rates are expected to increase. This minimizes the outflow in the form of EMIs that the home loan borrowers will experience”, he continues. So, no change in repo rates means no change in your home loan interest payout and no financial relief whatsoever. A rate cut, which most experts are anticipating will start this December, would mean your EMI payments come down, and your wallet might save a little more. But there’s also a chance of an UNO reverse happening. In case RBI is in the mood to hike the interest, your home loan EMIs might end up taking more from your pockets. Consider this. You took a floating interest rate home loan worth Rs 50 lakh in January 2022 at 8% p.a., for a period of 20 years. This brings your total monthly EMI to Rs Rs 41,822. But, as luck would (or won't) have it, RBI raised the interest rate by 250 basis points between May 2022 and February 2023, bringing it to its current status of 6.5%. Some back-of-the-envelope calculations suggest that now, your home loan interest payout will also rise by a hefty 2.5%, taking the total to 10.5%. In other words, you’ll have to dish out Rs 49,919 per month as EMI. Now, won't you heave a sigh of relief if the RBI were to bring down the interest rate by say, even 50 basis points, or 0.5%? Agreed, your EMI will come down just marginally, to Rs 48,251. But look at this over a 20-year period, and you’ll see how big the difference is. <h2>Are rates set to change anytime soon?</h2>Generally, RBI hikes the repo rates if it sees inflation spiralling out of control. Then, in a bid to reduce consumer spending, it raises interest rates to make borrowing expensive. But when the apex bank sees sluggish consumption in the economy, inflation in control and wants to boost spending, it slashes down on interest rates, making it more lucrative for people to borrow. As of now, most experts are not anticipating any changes in the interest rates anytime soon. This means home loans are not getting cheaper anytime soon. The CPI data, which came out yesterday, saw inflation rise to 5.49% in September, compared to 3.65% last month. Food and beverage prices jumped to a four-month high of 8.36% in September, as opposed to a 5.3% rise in August. So a rate cut seems a no-go at the moment! Apurva Sheth, Head of Market Perspectives and Research, SAMCO Securities explains that the RBI had probably expected a hardening of inflation and that's why it chose to hold on to the rates in the monetary policy announcement last week. “Now, it seems that RBI will take a cautious stance going ahead and will not be in a hurry into rate cuts like its global peers”, he added. In all this, one thing is clear, in the grand movie of the Indian economy, the RBI has chosen stability over drama. And just like in every good Bollywood film, we're left wondering what twist the sequel will bring. Until then, it might be “The End" for rate cuts, but the show must go on for the Indian economy!

Boom or bust — how RBI’s decision to leave rates unchanged affects homebuyers

<div type="image" title="The RBI has cracked the regulatory whip on NBFCs and banks, who&amp;#39;ve been pushing microfinance and unsecured loans aggressively to grow their loan books." agency="ANI" msid="114778648" hostid="261" caption="&amp;lt;p&amp;gt;The RBI has cracked the regulatory whip on NBFCs and banks, who&amp;#39;ve been pushing microfinance and unsecured loans aggressively to grow their loan books.&amp;lt;/p&amp;gt;"></div> Imagine this. You have a younger sibling you’re mighty envious of. And why not? Unlike you, they seem to enjoy all the freedom and money in the world. They party like there’s no tomorrow, and here you are, stuck in a boring, ultra-disciplined but responsible routine that feels completely devoid of any independence, and mostly, funds. But of late, things are changing. This sibling is in massive trouble and just cannot escape the parent’s wrath anymore. Long story short, the party is over, and it is time to go back home. The rising defaults on this sibling’s part have now begun pulling the entire house down, thereby attracting the regulator’s ire. <h2>The Wild West of <keyword id="113684" type="General" weightage="20" keywordseo="microfinance" source="Orion">microfinance</keyword> and unsecured loans</h2>It's hard to ignore the issues with microfinance and unsecured loans in India. Many saw them as a small gamble and ignored the rising defaults much like the younger siblings’ tantrums, and now they find themselves in hot waters. The skyrocketing instances of non-payments aren't a micro-issue anymore and are threatening the stability of the entire banking system. In the quarter ended September 30, 2024, 5 of India’s 8 largest private sector <keyword id="19934118" type="General" weightage="20" keywordseo="banks" source="keywords">banks</keyword> reported a steep rise in their bad loan book, mostly thanks to microfinance loans. Some banks, in a bid to strengthen their fortress against these <keyword id="142154" type="General" weightage="100" keywordseo="bad-loans" source="Orion">bad loans</keyword>, have significantly upped their provisions. For instance, IndusInd Bank set aside Rs 525 crore during July and September 2024 to battle the menace of defaults on microfinance loans, which make up about 9% of its total loan book. See, banks rely heavily on their interest income, which they earn from advancing loans. Any loan where the borrower has not paid interest to the bank or defaulted for 90 days or more becomes bad, i.e. an NPA, or non-performing asset for the bank. And who likes things going bad? Simply put, there has been a steep rise in three areas, much to the dislike of banks and MFIs (micro-finance institutions). But hey, it's mostly their doing! <ol><li>GNPA ratio (gross net performing assets): The quantum of non-performing assets a bank has in proportion to its total assets.</li><li>Provision: The amount banks set aside to take care of such NPAs.</li><li>Slippage ratio: The rate at which good girls go bad, or the speed at which good loans turn into NPAs</li></ol>But how are these plaguing the Indian banking sector? And what does the road ahead look like? We decode it for you. <h2> Microfinance: A not-so-micro-menace</h2>Microfinance loans were initially brought forth for low-income households and individuals i.e. for those who might not generally have access to traditional ways of credit, like bank loans and more. They don’t require collateral or an asset to be pledged in lieu of the loan, making it a tad bit easier for borrowers. As of June 2024, the amount of outstanding loans in the microfinance industry stood at a staggering Rs 4,20,256 crore. Of this, NBFC-MFIs accounted for 40% and banks made for 33% of these. In 2022, RBI, in a bid to inspire some competition in this space, did something radical-they did away with the ceiling on how much interest MFIs could charge their customers. Previously, MFIs could add up to 12% to their cost of acquiring funds to determine the final interest rate chargeable to the consumer. So, assuming that Bank A incurs a 5% cost to acquire funds for further loaning, A could charge up to 17% interest from the end consumer. So, interest rates were in the hands of MFIs, and boy, did they have a gala time with it. Instead of spurring some healthy competition, as RBI expected, MFIs and banks went rogue and all guns blazing, competing for the title of “Who will charge the highest interest?” Recently, RBI banned 4 microfinance institutions (MFIs), namely Asirvad Micro Finance Limited, Arohan Financial Services Limited, DMI Finance Private Limited, and <keyword id="20117932" type="General" weightage="20" keywordseo="navi-finserv" source="keywords">Navi Finserv</keyword> from disbursing loans effective October 21, 2024. Why? Because they were charging 14% extra interest over their original cost of funds. To maintain their loan books (and pockets), banks and NBFCs resorted to shady practices like netting off loans, which RBI has now advised MFIs against. Here, lenders allow borrowers to settle a previous outstanding loan by issuing them a new loan! As crazy as it sounds, it helped banks to report less of their total assets as NPAs, since the new credit would cover pending instalments of the borrower’s previous loan. Then there was the issue of borrowers overleveraging, i.e. taking multiple loans using different IDs from various lenders and then failing to honour any of them. The consequence? Banks and NBFCs end up with massive NPAs. Data from credit bureaus suggests that over the last quarter, there was a 17.2% rise in the number of borrowers who had 5 or more active loans at the same time. <h2>Growth &gt; Caution</h2>It's an age-old tale unfolding yet again in India’s banking sector- Icarus flew too close to the sun and eventually, fell to its death. Between April and June 2024, NBFCs microfinance portfolio jumped by 2.7%. If you see this in terms of loan sources, microfinance loans issued by banks grew by 11.2% in Q1FY25. But the same portfolio in NBFCs swelled by almost double-23.9%. While most of these loans had an average ticket size between Rs 30,000-50,000, there was a sharp spike in the number of loans that had a ticket size of Rs 80,000 or more. Data suggests that as of March 2024, more than 12% of all microfinance borrowers had over 4 or more active loans. In dating parlance, this is a classic case of borrowers going polyamorous, minus the honesty and transparency. Not the best of situations, you'd agree! <h2>Will banks and NBFCs stand up to this stress?</h2>If their results for Q2FY25 are to be believed, NBFCs are not handling the pressure all that well. Or even slightly well. Only a few banks like Bank of Baroda (BoB), ICICI, and Indian Bank were up for the battle, even witnessing a decline in their loan delinquencies. Some others, like IndusInd Bank, saw their stock dip by a massive 16.2% over the last 5 days. Its slippages in the previous quarter burgeoned from Rs 15.3 billion in Q1FY25 to Rs 17.9 billion in Q2. As a result, the bank pushed a staggeringly high amount of money to create an NPA cushion for itself. While its management has highlighted its preference for secured lending, that was hardly reflected in its actions during the quarter, where growth in unsecured personal loans remained exceptionally high at over 7% on a QoQ basis. Turns out, only 44% of customers in IndusInd Banks’ microfinance loan portfolio were exclusive to it. The rest 47% were, you guessed it right-polyamorous! 27% had borrowed from another lender as well, apart from IndusInd Bank, while 20% were those who had outstanding loans with two other lenders, apart from IndusInd Bank. IndusInd Bank’s credit card segment did not miss the NPA bus and accounted for 7-8% of its GNPAs. Canara Bank’s total slippages during the previous quarter jumped to Rs 11.1 billion, up by 24.7% QoQ, and making up for 3.6% of its total loans. As for Bandhan Bank, its gross NPA for Q2FY25 inched up on a QoQ basis, up from 4.23% in Q1, to 4.68% in the second quarter. IDFC Bank’s heavy provisioning for its NPAs marred its profits significantly, causing its PAT (profit after tax) to dip by 73% on a YoY basis. Data from ICRA Analytics suggest that the AUM (asset under management) growth in microfinance loans and unsecured (personal and business) loans by the NBFCs will moderate to 10-12% and 19-21%, respectively, in FY2025 compared to 30% and 38%, in FY2024. Says A M Karthik, Senior Vice President &amp; Co-Group Head, Financial Sector Ratings, ICRA, “As bank funds constitute a larger share in the overall funding of NBFCs, a slower credit flow from banks to the NBFCs will compress their AUM growth. The NBFCs in unsecured and digital lending businesses shall face a higher squeeze in funding compared to others, and the unsecured lending space will continue to be a source of stress in the near term.” There has been uninhibited growth in <keyword id="6051027" type="General" weightage="20" keywordseo="Unsecured-loan" source="Orion">unsecured loan</keyword>s, apart from just the microfinance segment. For instance, Axis Bank’s gross slippages jumped by Rs 4,443 crore, largely thanks to its unsecured business. The same is the case with Yes Bank, which saw 35–40% of its retail slippages emerging from the unsecured loan portfolio. <keyword id="6376194" type="General" weightage="20" keywordseo="kotak-mahindra" source="Orion">Kotak Mahindra</keyword> Bank was also quick to follow Yes Bank’s suit, with around 35%-40% of its slippages coming from credit cards. <h2>How is the road ahead?</h2>While RBI has just cracked its whip and served a warning at the moment, experts at Morgan Stanley believe that more changes (read regulatory lashes) are underway. Moreover, with both festive and wedding seasons underway in our country, unsecured lending might pick up momentum, much to the disdain of the calibrated approach banks have been taking towards it so far. But if the situation doesn't improve, RBI will not waste any time in becoming the typical tyrannical <keyword id="19897820" type="General" weightage="20" keywordseo="bollywood" source="keywords">Bollywood</keyword> headmaster who runs his dominion with an iron fist. However, that's a story for another day. Do you have a topic in mind you'd want a simpler explanation for, or insights or personal experience to share on personal finance and more? Contact us at businessinsider@timesinternet.in.

Simply Put: Is the lending party over? The dangerous tango of Indian banks with microfinance and unsecured loans

Imagine this. You have a younger sibling you’re mighty envious of. And why not? Unlike you, they seem to enjoy all the freedom and money in the world. They party like there’s no tomorrow, and here you are, stuck in a boring, ultra-disciplined but responsible routine that feels completely devoid of any independence, and mostly, funds. But of late, things are changing. This sibling is in massive trouble and just cannot escape the parent’s wrath anymore. Long story short, the party is over, and it is time to go back home. The rising defaults on this sibling’s part have now begun pulling the entire house down, thereby attracting the regulator’s ire. <h2>The Wild West of microfinance and unsecured loans</h2>It's hard to ignore the issues with microfinance and unsecured loans in India. Many saw them as a small gamble and ignored the rising defaults much like the younger siblings’ tantrums, and now they find themselves in hot waters. The skyrocketing instances of non-payments aren't a micro-issue anymore and are threatening the stability of the entire banking system. In the quarter ended September 30, 2024, 5 of India’s 8 largest private sector <keyword id="19934118" type="General" weightage="20" keywordseo="banks" source="keywords">banks</keyword> reported a steep rise in their bad loan book, mostly thanks to microfinance loans. Some banks, in a bid to strengthen their fortress against these <keyword id="142154" type="General" weightage="100" keywordseo="bad-loans" source="Orion">bad loans</keyword>, have significantly upped their provisions. For instance, <keyword id="46717" type="General" weightage="20" keywordseo="IndusInd-bank" source="Orion">IndusInd Bank</keyword> set aside Rs 525 crore during July and September 2024 to battle the menace of defaults on microfinance loans, which make up about 9% of its total loan book. See, banks rely heavily on their interest income, which they earn from advancing loans. Any loan where the borrower has not paid interest to the bank or defaulted for 90 days or more becomes bad, i.e., an <keyword id="79363" type="General" weightage="20" keywordseo="npa" source="Orion">NPA</keyword>, or non-performing asset for the bank. And who likes things going bad? Simply put, there has been a steep rise in three areas, much to the dislike of banks and MFIs (micro-finance institutions). But hey, it's mostly their doing! <ol><li>GNPA ratio (gross net performing assets): The quantum of non-performing assets a bank has in proportion to its total assets.</li><li>Provision: The amount banks set aside to take care of such NPAs.</li><li>Slippage ratio: The rate at which good girls go bad, or the speed at which good loans turn into NPAs</li></ol>But how are these plaguing the Indian banking sector? And what does the road ahead look like? We decode it for you. <h2> Microfinance: A not-so-micro-menace</h2>Microfinance loans were initially brought forth for low-income households and individuals, i.e. for those who might not generally have access to traditional ways of credit, like bank loans and more. They don’t require collateral or an asset to be pledged in lieu of the loan, making it a tad bit easier for borrowers. As of June 2024, the amount of outstanding loans in the microfinance industry stood at a staggering Rs 4,20,256 crore. Of this, NBFC-MFIs accounted for 40% and banks made for 33% of these. In 2022, <keyword id="30067" type="General" weightage="20" keywordseo="RBI" source="Orion">RBI</keyword>, in a bid to inspire some competition in this space, did something radical-they did away with the ceiling on how much interest MFIs could charge their customers. Previously, MFIs could add up to 12% to their cost of acquiring funds to determine the final interest rate chargeable to the consumer. So, assuming that Bank A incurs a 5% cost to acquire funds for further loaning, A could charge up to 17% interest from the end consumer. So, interest rates were in the hands of MFIs, and boy, did they have a gala time with it. Instead of spurring some healthy competition, as RBI expected, MFIs and banks went rogue and all guns blazing, competing for the title of “Who will charge the highest interest?” Recently, RBI banned 4 microfinance institutions (MFIs), namely Asirvad Micro Finance Limited, Arohan Financial Services Limited, DMI Finance Private Limited, and Navi Finserv, from disbursing loans effective October 21, 2024. Why? Because they were charging 14% extra interest over their original cost of funds. To maintain their loan books (and pockets), banks and NBFCs resorted to shady practices like netting off loans, which RBI has now advised MFIs against. Here, lenders allow borrowers to settle a previous outstanding loan by issuing them a new loan! As crazy as it sounds, it helped banks to report less of their total assets as NPAs, since the new credit would cover pending installments of the borrower’s previous loan. Then there was the issue of borrowers overleveraging, i.e. taking multiple loans using different IDs from various lenders and then failing to honor any of them. The consequence? Banks and NBFCs end up with massive NPAs. Data from credit bureaus suggests that over the last quarter, there was a 17.2% rise in the number of borrowers who had 5 or more active loans at the same time. <h2>Growth &gt; Caution</h2>It's an age-old tale unfolding yet again in India’s banking sector- Icarus flew too close to the sun and eventually, fell to its death. Between April and June 2024, NBFCs microfinance portfolio jumped by 2.7%. If you see this in terms of loan sources, microfinance loans issued by banks grew by 11.2% in Q1FY25. But the same portfolio in NBFCs swelled by almost double-23.9%. While most of these loans had an average ticket size between Rs 30,000-50,000, there was a sharp spike in the number of loans that had a ticket size of Rs 80,000 or more. Data suggests that as of March 2024, more than 12% of all microfinance borrowers had over 4 or more active loans. In dating parlance, this is a classic case of borrowers going polyamorous, minus the honesty and transparency. Not the best of situations, you'd agree! <h2>Will banks and NBFCs stand up to this stress?</h2>If their results for Q2FY25 are to be believed, NBFCs are not handling the pressure all that well. Or even slightly well. Only a few banks like Bank of Baroda (BoB), ICICI, and Indian Bank were up for the battle, even witnessing a decline in their loan delinquencies. Some others, like IndusInd Bank, saw their stock dip by a massive 16.2% over the last 5 days. Its slippages in the previous quarter burgeoned from Rs 15.3 billion in Q1FY25 to Rs 17.9 billion in Q2. As a result, the bank pushed a staggeringly high amount of money to create an NPA cushion for itself. While its management has highlighted its preference for secured lending, that was hardly reflected in its actions during the quarter, where growth in unsecured personal loans remained exceptionally high at over 7% on a QoQ basis. Turns out, only 44% of customers in IndusInd Banks’ microfinance loan portfolio were exclusive to it. The rest 47% were, you guessed it right-polyamorous! 27% had borrowed from another lender as well, apart from IndusInd Bank, while 20% were those who had outstanding loans with two other lenders, apart from IndusInd Bank. IndusInd Bank’s credit card segment did not miss the NPA bus and accounted for 7-8% of its GNPAs. Canara Bank’s total slippages during the previous quarter jumped to Rs 11.1 billion, up by 24.7% QoQ, and making up for 3.6% of its total loans. As for Bandhan Bank, its <keyword id="763994" type="General" weightage="20" keywordseo="Gross-NPA" source="Orion">gross NPA</keyword> for Q2FY25 inched up on a QoQ basis, up from 4.23% in Q1, to 4.68% in the second quarter. <keyword id="62152" type="General" weightage="20" keywordseo="IDFC-bank" source="Orion">IDFC Bank</keyword>’s heavy provisioning for its NPAs marred its profits significantly, causing its PAT (profit after tax) to dip by 73% on a YoY basis. Data from ICRA Analytics suggest that the AUM (asset under management) growth in microfinance loans and unsecured (personal and business) loans by the NBFCs will moderate to 10-12% and 19-21%, respectively, in FY2025 compared to 30% and 38%, in FY2024. Says A M Karthik, Senior Vice President &amp; Co-Group Head, Financial Sector Ratings, ICRA, “As bank funds constitute a larger share in the overall funding of NBFCs, a slower credit flow from banks to the NBFCs will compress their AUM growth. The NBFCs in unsecured and digital lending businesses shall face a higher squeeze in funding compared to others, and the unsecured lending space will continue to be a source of stress in the near term.” There has been uninhibited growth in unsecured loans, apart from just the microfinance segment. For instance, Axis Bank’s gross slippages jumped by Rs 4,443 crore, largely thanks to its unsecured business. The same is the case with Yes Bank, which saw 35–40% of its retail slippages emerging from the unsecured loan portfolio. Kotak Mahindra Bank was also quick to follow Yes Bank’s suit, with around 35%-40% of its slippages coming from credit cards. <h2>How is the road ahead?</h2>While RBI has just cracked its whip and served a warning at the moment, experts at Morgan Stanley believe that more changes (read regulatory lashes) are underway. Moreover, with both festive and wedding seasons underway in our country, unsecured lending might pick up momentum, much to the disdain of the calibrated approach banks have been taking towards it so far. But if the situation doesn't improve, RBI will not waste any time in becoming the typical tyrannical Bollywood headmaster who runs his dominion with an iron fist and takes things (and ceiling rates) into their own hands. However, that's a story for another day.

Is the lending party over? The dangerous tango of Indian banks with microfinance and unsecured loans

<div type="image" title="In case RBI is in the mood to hike the interest, your home loan EMIs might end up taking more from your pockets. Or, if it leaves the rates unchanged, your EMIs wont budge one bit" msid="114284206" hostid="261" caption="&amp;lt;p&amp;gt;In case RBI is in the mood to hike the interest, your home loan EMIs might end up taking more from your pockets. Or, if it leaves the rates unchanged, your EMIs wont budge one bit&amp;lt;/p&amp;gt;"></div> On September 18, 2024, the <keyword id="19951097" type="General" weightage="20" keywordseo="us-fed" source="keywords">US Fed</keyword> delivered a jumbo-sized surprise to the global economy. Not only did they trim their interest rates by a massive 50 basis points to bring their yields down to 5%, but also hinted at further rate cuts in the upcoming months. This move from the fed and several other central banks globally had pushed expectations high for a similar rate slash closer home, from the <keyword id="19899808" type="General" weightage="100" keywordseo="rbi" source="keywords">RBI</keyword> this month. But governor <keyword id="19913110" type="General" weightage="20" keywordseo="shaktikanta-das" source="keywords">Shaktikanta Das</keyword>, in a “picture abhi baaki hai” moment, decided to hold the repo rates here steady, leaving them unchanged at 6.5% for the record 10th straight time. Although, he did tinker with the policy stand, changing it from “rate cuts are absolutely off the table” to a more accommodating “we’re okay with bringing down the rates, if needed”. This, rather neutral, stance from India’s financial custodian sparked hopes for a rate cut in December this year. However, the stubborn <keyword id="22195" type="General" weightage="20" keywordseo="inflation" source="Orion">inflation</keyword> levels in September have again dented such hopes. As consumers, you may be wondering what all the hullabaloo this is about, since it hardly makes a difference to your regular financial routine. Well, the majority of both economic growth and inflation is closely connected to this policy stance from the central bank and it does have a rather indirect effect on both our earnings and spending. But more directly, it would have clear implications for those looking to own a house. Even the slightest modification of interest rates, or the lack of it, influences the <keyword id="19916018" type="General" weightage="20" keywordseo="emi" source="keywords">EMI</keyword> you pay significantly. So, all aspiring homebuyers, is this the right time to take out a loan and buy a house? Can you expect a rate cut anytime soon, and what will that mean for your home-owning dreams? We lay it out. <h2>What’s the connection?</h2>You see, buying a house is no small feat, at least financially. The task becomes even more herculean if you are scouting for your own roof in cities like Delhi, Noida, Bangalore or Mumbai where, as Circuit from Munnabhai says, “room shuru hote hi khatam ho jata hai”. Naturally, you’ll have to take a <keyword id="6354730" type="General" weightage="20" keywordseo="Home-loan" source="Orion">home loan</keyword> from the bank. Don’t be mistaken, the bank won't give you a loan that covers 100% of the value of the property you want to own. Rather, your loan amount will be equivalent to a certain percentage of the property’s total value. RBI’s guidelines on this are pretty clear: <ul><li>If your loan amount is up to Rs 30 lakh, you can get a loan worth 90% of the property’s value.</li></ul><ul><li>If the loan amount is between Rs 30 lakh and Rs 75 lakh, you are eligible for a loan worth 80% of the property’s value. </li><li>If you are taking a loan of more than Rs 75 lakh, your loan amount will be equivalent to 70% of the property’s value. </li></ul>Now assuming that you have the money, it's all about paying back the principal amount, but not without a little (read hefty) interest added on top. See, when you’re taking a home loan, you are actually signing up for a long-term, even multi-decadal financial commitment, which will unfailingly present itself to your bank accounts and finances every single month, in the form of EMIs, or equated monthly instalments). When you take a home loan, you can choose to pay the interest in two ways (talk about choices!). One is that you decide to keep a fixed rate of interest throughout the tenure of your home loan. So, if you opt for a 25-year fixed-rate home loan at the rate of 8.8% p.a., you’ll have to pay interest at this rate for the next 25 years, till your entire loan is paid off. Yes, you can go backsies and switch to a floating-rate home loan by paying a fee. Floating, as the name suggests, means that your interest rate is not set in stone. But starting October 2019, when it comes to a floating interest rate home loan, your payable interest and EMIs are directly impacted by any changes in <keyword id="20094323" type="General" weightage="20" keywordseo="repo-rate" source="keywords">repo rate</keyword>, which were left unchanged by RBI this time around. Why are these two so chummy, you might ask. Well, <keyword id="173069" type="General" weightage="20" keywordseo="Home-loan-interest" source="Orion">home loan interest</keyword> rates are a sum of two things: <ol><li>Repo Rate (the rate at which RBI lends money to banks)</li><li>Operational cost + margins</li></ol>Any plus or minus in this equation would send your home loan interests tanking, or skyrocketing. Vivek Iyer, Partner, Grant Thornton Bharat explains that any change in the repo rates impacts the cost of funds and thereby the home loan interest rates. “When the interest rates are expected to reduce, the corresponding impact will be in the form of a reduced EMI. Home loan borrowers should always try to borrow at a floating rate when interest rates are expected to reduce and at a fixed rate when the interest rates are expected to increase. This minimizes the outflow in the form of EMIs that the home loan borrowers will experience”, he continues. So, no change in repo rates means no change in your home loan interest payout and no financial relief whatsoever. A rate cut, which most experts are anticipating will start this December, would mean your EMI payments come down, and your wallet might save a little more. But there’s also a chance of an UNO reverse happening. In case RBI is in the mood to hike the interest, your home loan EMIs might end up taking more from your pockets. Consider this. You took a floating interest rate home loan worth Rs 50 lakh in January 2022 at 8% p.a., for a period of 20 years. This brings your total monthly EMI to Rs Rs 41,822. But, as luck would (or won't) have it, RBI raised the interest rate by 250 basis points between May 2022 and February 2023, bringing it to its current status of 6.5%. Some back-of-the-envelope calculations suggest that now, your home loan interest payout will also rise by a hefty 2.5%, taking the total to 10.5%. In other words, you’ll have to dish out Rs 49,919 per month as EMI. Now, won't you heave a sigh of relief if the RBI were to bring down the interest rate by say, even 50 basis points, or 0.5%? Agreed, your EMI will come down just marginally, to Rs 48,251. But look at this over a 20-year period, and you’ll see how big the difference is. <h2>Are rates set to change anytime soon?</h2>Generally, RBI hikes the repo rates if it sees inflation spiralling out of control. Then, in a bid to reduce consumer spending, it raises interest rates to make borrowing expensive. But when the apex bank sees sluggish consumption in the economy, inflation in control and wants to boost spending, it slashes down on interest rates, making it more lucrative for people to borrow. As of now, most experts are not anticipating any changes in the interest rates anytime soon. This means home loans are not getting cheaper anytime soon. The CPI data, which came out yesterday, saw inflation rise to 5.49% in September, compared to 3.65% last month. Food and beverage prices jumped to a four-month high of 8.36% in September, as opposed to a 5.3% rise in August. So a rate cut seems a no-go at the moment! Apurva Sheth, Head of Market Perspectives and Research, SAMCO Securities explains that the RBI had probably expected a hardening of inflation and that's why it chose to hold on to the rates in the monetary policy announcement last week. “Now, it seems that RBI will take a cautious stance going ahead and will not be in a hurry into rate cuts like its global peers”, he added. In all this, one thing is clear, in the grand movie of the Indian economy, the RBI has chosen stability over drama. And just like in every good Bollywood film, we're left wondering what twist the sequel will bring. Until then, it might be “The End" for rate cuts, but the show must go on for the Indian economy!

Simply Put: Boom or bust — how RBI’s decision to leave rates unchanged affects homebuyers

Dear readers, As we approach yet another weekend, here are some key developments across various sectors. Nvidia has surpassed Apple to become the world’s largest company, driven by the AI boom. Meanwhile, the US Federal Reserve cut interest rates, by 25 basis points to 4.75%, the second such reduction in 2024. In the workplace, Gen Z’s approach to mental health got attention, with one employee taking a week off after a breakup. Additionally, Indian banks are expecting steady growth, despite challenges in unsecured lending. Read on for all the details! <h2>Top stories from the week </h2> Indian banks to have steady growth in earnings over next 3-4 years, fees from unsecured lending may dip, notes Jefferies report Jefferies forecasts steady earnings growth for Indian banks over the next 3–4 years, with a 13% annual loan growth rate. However, a decline in unsecured lending could reduce fee income. While net interest income is expected to grow at 12%, challenges such as rising defaults and a potential dip in rate cuts could affect profitability. Despite this, banks’ return on equity and assets remain promising. <a href="https://www.businessinsider.in/finance/news/indian-banks-to-have-steady-growth-in-earning-over-next-3-4-years-fees-from-unsecured-lending-may-dip-notes-jefferies-report/articleshow/115048179.cms" data-type="tilCustomLink" target="_blank">Read more</a> Nvidia becomes world’s largest company amid AI boom, surpasses Apple in the race Nvidia has surpassed Apple to become the world’s largest company by market capitalization, driven by the AI boom. The company’s strong performance is fueled by surging demand for its chips used in AI technologies. With a market cap hitting $3.43 trillion, Nvidia continues to dominate the AI hardware sector, powering data centres and AI research. The company’s revenue growth of 122% YoY further cements its leadership in the AI space. <a href="https://www.businessinsider.in/business/news/nvidia-becomes-worlds-largest-company-amid-ai-boom-surpasses-apple-in-the-race/articleshow/115003223.cms" data-type="tilCustomLink" target="_blank">Read more</a> ‘He had a breakup and took a one-week leave’: Manager shares about his Gen-Z employee, internet reacts A manager’s tweet about granting a Gen Z employee a week off for a breakup sparked widespread debate. While the manager expressed frustration over project delays, internet users defended the employee’s mental health needs, criticizing the manager’s lack of empathy. Some supported the manager’s view, pointing out generational differences in work culture. The incident went viral, furthering discussions about Gen Z’s unique workplace expectations. <a href="https://www.businessinsider.in/careers/news/he-had-a-breakup-and-took-a-one-week-leave-manager-shares-about-his-gen-z-employee-internet-reacts/articleshow/115041747.cms" data-type="tilCustomLink" target="_blank">Read more</a> US Fed cuts interest rates by 25 bps, Powell notes Trump’s victory to have no impact on policy decisions The US Federal Reserve has cut interest rates by 25 basis points to 4.75%, the second such reduction in 2024. Fed Chairman Jerome Powell emphasized the Fed’s independence despite Trump’s criticism and suggested that the economic outlook remains uncertain, though the Fed is focused on inflation targets. Trump’s policies may lead to higher inflation, adding complexity to the Fed’s efforts to stabilize prices. Experts anticipate that bond yields will stabilize, benefiting emerging markets like India. <a href="https://www.businessinsider.in/finance/news/us-fed-cuts-interest-rates-by-25-bps-powell-notes-trumps-victory-to-have-no-impact-on-policy-decisions/articleshow/115070690.cms" data-type="tilCustomLink" target="_blank">Read more</a> Big Tech’s winners and losers from Donald Trump’s win, according to the market After Donald Trump’s election victory, tech stocks surged, with companies like Tesla seeing significant gains. Tesla’s rise was fueled by Trump’s public support for CEO Elon Musk. Conversely, companies like Apple faced challenges due to fears over potential tariffs on China. While some, like Google, might benefit from lighter regulations, others like Meta could face political challenges. Overall, the election results reshaped market expectations for Big Tech’s future. <a href="https://www.businessinsider.in/tech/news/here-are-big-techs-winners-and-losers-from-donald-trumps-win-according-to-the-market/articleshow/115067798.cms" data-type="tilCustomLink" target="_blank">Read more</a> <h2>Top web stories</h2> <a href="https://www.businessinsider.in/entertainment/webstories/donald-trump-on-screen-a-look-at-his-iconic-cameos/slidelist/115045250.cms" data-type="tilCustomLink" target="_blank">Donald Trump on screen: A look at his iconic cameos</a> <a href="https://www.businessinsider.in/india/webstories/8-lifestyle-mistakes-contributing-to-health-problems-in-india/slidelist/115051791.cms" data-type="tilCustomLink" target="_blank">8 lifestyle mistakes contributing to health problems in India</a> <a href="https://www.businessinsider.in/travel/india/webstories/10-magical-indian-experiences-every-traveller-should-try/slidelist/115052527.cms" data-type="tilCustomLink" target="_blank">10 magical Indian experiences every traveller should try</a>

Weekend wrap: Nvidia’s AI-driven surge, Indian banks’ steady growth and more

Top 8 banks offering low interest rates on home loans; check full list here

Amid questions on the depleting <keyword id="20776807" type="General" weightage="100" keywordseo="loan-to-deposit-ratio" source="keywords">loan-to-deposit ratio</keyword> in <keyword id="19895091" type="General" weightage="20" keywordseo="Indian-banks" source="keywords">Indian banks</keyword>, a recent report by <keyword id="19896146" type="General" weightage="20" keywordseo="Motilal-Oswal" source="keywords" meta.keywordsubtype="org" meta.entityname="Motilal Oswal" meta.hostid="269" meta.entityid="Motilal Oswal">Motilal Oswal</keyword> suggests that the loan-to-deposit (LD) ratio is likely to subside on its own in the coming months. The debate on loan-to-deposit ratio (LD), particularly concerning sluggish <keyword id="19998084" type="General" weightage="20" keywordseo="deposit-growth" source="keywords">deposit growth</keyword> and potential risks to <keyword id="20089808" type="General" weightage="20" keywordseo="financial-stability" source="keywords">financial stability</keyword> is raised by even the finance minister and the <keyword id="20151998" type="General" weightage="20" keywordseo="RBI-governor" source="keywords">RBI governor</keyword>. However, the report notes that on closer examination, the situation may not be as alarming as it seems. As of 9th August, 2024 the Indian <keyword id="19964544" type="General" weightage="20" keywordseo="banking-sector" source="keywords">banking sector</keyword>'s loan-to-deposit (LD) ratio stood at 77.2 %, which is slightly below its recent peak of 78.2 % on 22nd March 2024, and its all-time high of 78.8 % in September 2013. The report stated that typically a rising LD ratio is indicative of a tightness in the banking sector, potentially indicating overheating. A lower LD indicates that the bank is aggressive in its credit disbursement practises, which could be risky. It highlighted that an analysis of the sector's transactions with the Reserve Bank of India (RBI) through the liquidity adjustment facility (LAF), along with recent trends in the weighted average call rate (WACR), suggests that the current rise in the LD ratio does not indicate tightness, which is why there is no immediate cause of concern. In fact, the report added that the concern over weak deposit growth may be overstated. Historical data show that bank deposits grew at an average rate of 9.5 % during the pre-COVID period (January 2015 to February 2020) and 10.4 % in the post-COVID period (March 2020 to August 2024). Earlier, Finance Minister Nirmala Sitharaman also urged state-run banks to enhance deposit mobilization through attractive offers and focusing on Tier-2 and Tier-3 cities. Loan-to-deposit ratio pegs the total deposits received by the bank against the loans it has offered. It helps in understanding how liquid the bank is. The loan-to-deposit ratio (LDR) is a financial metric that compares a bank's total loans to its total deposits. It's used to assess a bank's liquidity and credit risk, and to inform lending and deposit-taking decisions The report said while the exact measures are unclear, the deposit growth could potentially be increased by making other asset classes less attractive through taxation or interest rates, or by boosting fiscal spending to increase net credit to the government. In its forecast, the report noted that private banks will witness a moderation in their <keyword id="19998083" type="General" weightage="20" keywordseo="credit-growth" source="keywords">credit growth</keyword>, while public sector banks will maintain a healthy credit growth rate. "Our analysis suggests that deposit growth could be raised by either making other asset classes unattractive (through taxation and/or interest rate) or increasing the growth in net credit to the government by pushing fiscal spending higher" the report added. Alternatively, policymakers might consider curtailing loan growth to lower the LD ratio. However, this could slow deposit growth, particularly if corporate credit growth remains weak. Encouraging savers to shift investments from other assets to bank deposits could also be an option, but this carries risks of overreach and potential damage to economic confidence. Das had also flagged the excessive growth, or froth developing in the personal loan space. Notably, while credit growth in unsecured personal loans like credit cards continues to decline, it remains elevated at 23.3% as of June 2024. However, this is a significant reduction from 34.2% witnessed in November 2023. As fiscal spending increases, bank credit to the government is likely to grow, which should elevate deposits and broad money supply. The report said "However, the extent of foreign capital inflows and the RBI's policy for managing these inflows remain uncertain". Last month, RBI governor Shaktikanta Das had also addressed this issue in the 50th meeting of MPC (Monetary Policy Committee). Per him, deposit mobilisation has been lagging credit growth for some time now. This may potentially expose the system to structural liquidity issues. "While there could be a debate regarding ‘deposits funding loans’ vis-à-vis ‘loans funding deposits’, the current regulatory concern stems from the fact that there could be structural changes happening which banks need to recognise and, accordingly, devise their strategies. Households and consumers who traditionally leaned on banks for parking or investing their savings are increasingly turning to capital markets and other financial intermediaries", Das said. Per him, while bank deposits continue to remain dominant as a percentage of financial assets owned by households, their share has been declining consistently, since households are now increasingly allocating their savings to mutual funds, insurance funds, pension funds and other avenues.

Loan-to-deposit ratio will subside on its own in coming months, notes Motilal Oswal report

The <keyword id="19899810" type="General" weightage="20" keywordseo="Reserve-Bank-of-India" source="keywords" meta.keywordsubtype="org" meta.entityname="Reserve Bank of India" meta.hostid="261" meta.entityid="Reserve Bank of India">Reserve Bank of India</keyword> announced the decision of the newly formed six-member MPC (<keyword id="19913109" type="General" weightage="20" keywordseo="Monetary-Policy-Committee" source="keywords">Monetary Policy Committee</keyword>) today, following the conclusion of the three-day meeting, which began on October 7, 2024. Treading along expected lines, RBI rate-setting panel left the repo rate unchanged at 6.5% for the 10th consecutive time, in its 51st meeting today. The decision was made by a majority, with 5 out of 6 members voting for leaving the rate unchanged. This is the fourth bi-monthly monetary policy review for FY25, and the first since three external members were appointed to the panel earlier this month. The tenure of the previous three members had come to an end on October 4, 2024. While the outgoing members include Ashima Goyal (emeritus professor, Indira Gandhi Institute of Development Research), Shashanka Bhide (honorary senior advisor, National Council of Applied Economic Research); and Jayanth R. Varma(professor, Indian Institute of Management, Ahmedabad), the income members are Ram Singh (Director, Delhi School of Economics), Saugata Bhattacharya, an economist; and Nagesh Kumar (Director and chief executive, Institute for Studies in Industrial Development). <h2>Wait and Watch </h2>RBI also changed its policy stance to neutral, while remaining committed to growth and bringing down inflation to its target of 4%. This means that at present, the bank is not inclined to either increase or decrease the interest rates, but will take a call depending on macroeconomic conditions and prevailing factors. "Taking all these factors into consideration, the real GDP growth for 2024-25 is projected at 7.2%, with Q2 at 7%, Q3 at 7.4% and Q4 at 7.4%", he said. As for inflation, Das highlighted that headline inflation had softened significantly in July and August and even food inflation experienced a certain degree of correction during these two months. Keeping this in mind, CPI inflation for 2024-25 i.e. current year is projected at 4.5%, with Q2 at 4.1%, Q3 at 4.8% and Q4 at 4.2%. CPI for first quarter of next financial year i.e. 2025-26 is estimated at 4.3%. "It's with a lot of effort that inflation horse has been brought to the stable, i.e. closer to the target and within the tolerance span, compared to its place or heightened levels two years ago. We have to be very careful about opening the gate, as the horse may simply hold again. We must keep the horse in tight leash, so that we do not lose control", Das added. Most economists had anticipated a change in the central bank's current policy stance of 'withdrawal of accommodation'. This policy stand indicates that any interest rate cuts are presently off the table. However, given the ongoing geopolitical crisis and Fed's jumbo rate cut by 50-basis points last month, RBI may bring about a cut in interest rates, sooner than later. However, since food inflation remains high at 5.42% as of July 2024, experts had also estimated that now might not have been a good time for RBI to bring down interest rates. Moreover, PMI (purchase managers index) indices, which help in gauging the health of manufacturing and service sectors in the country, presently stand at a multi-month low, and even the core sector output is witnessing a contraction after 42 straight months. As Suman Chowdhury, Executive Director &amp; Chief Economist, Acuité Ratings &amp; Research had highlighted, the current circumstances are not really conducive for RBI to opt for any affirmation action towards an easier monetary policy. "While the fear of the inflation “elephant” may have subsided with the CPI headline print well within 4.0% over the last two months and a favorable monsoon, the concerns around the stability of food inflation still linger among policy makers. The RBI may wait till December 2024 or February 2025 to make a rat cut, he continued. <h2>Housing sector rejoices</h2>From the point of view of homebuyers, the relatively affordable home loan interest rate regime will continue at a critical time for the Indian housing market - the festive season - amid rising housing prices and tapered sales. Q3 2024 saw average housing prices rise by a cumulative 23% in the top 7 cities even as average prices in these markets collectively rose to approximately Rs 8,390 per sq. ft. by Q3 2024-end, from Rs 6,800 per sq. ft. in Q3 2023. "The unchanged home loan rates are much-needed demand support in the ongoing festive quarter. We are expecting faster sales momentum in Q4 2024 when compared to the preceding quarter. This year's festive quarter may see similar demand to that seen in this period a year ago, if not higher. Over 1.27 lakh units were sold across the top 7 cities back in Q4 2023. Unchanged interest rates will play and important role in achieving and maintaining this momentum", says Anuj Puri, Chairman - ANAROCK Group

RBIs MPC meet concludes today: Repo rate left unchanged at 6.5%

“Ye le beta, humare khaandani sone ke gehne. Ise girvi rakhva de, shayad kuch paise aa jaye ghar main.” How many times have we seen similar dialogues repeat itself in Bollywood films of the 70s and 80s—abject poverty and a frail-looking old mother pleading to her son to pawn the family’s heirloom gold ornaments to a jeweller, all to get a few bucks? Well, if you’d ask that son in 2024, he’d rather hit the loan button on his <keyword id="105386" type="General" weightage="20" keywordseo="Demat-account" source="Orion">Demat account</keyword> than pawn his mother’s gold jewellery. Given how Indians are rapidly resorting to taking loans against their investments in shares and mutual funds, these might as well be a cherished family heirloom in today’s time. Fair warning though; it's not as if gold and loans against it are going down in India’s lending scene. It's very much the opposite, shining brighter than ever! The secured loan category is having its time in the spotlight, and people are certainly looking beyond land and property to get their hands on some extra monies! But what is funding the steep rise behind these loans? And are they as failsafe and secure as they’re made out to be? We decode for you in this week’s Simply Put. <h2 style="margin-bottom: 0.7em; line-height: 1.3; color: rgb(0, 0, 0); font-size: 24px; background: 0px 0px; text-rendering: optimizelegibility;">The great Indian pawning party</h2>Pawning one’s gold has been, by far, the OG Indian financial move to get a loan. That continues well into 2024, and apparently, more so when India decides to wed and celebrate! Data from <keyword id="30067" type="General" weightage="20" keywordseo="RBI" source="Orion">RBI</keyword> suggests that the outstanding amount on gold loans has swelled from Rs 85,009 crore in September 2022 to Rs 1,47,081 crore in September 2024. It looks like Gold took the motto of rise and shine too seriously! Table 1: Growth in gold loans <table class="redcator-table-advance" style="border-width: initial; border-style: none; background-color: rgb(255, 255, 255); font-size: 16px; line-height: 1.6em; box-shadow: none; width: 468pt; font-family: Merriweather; table-layout: fixed; padding-bottom: 10px !important; background-image: inherit !important; background-position: inherit !important; background-size: inherit !important; background-repeat: inherit !important; background-attachment: inherit !important; background-origin: inherit !important; background-clip: inherit !important;"></colgroup><tbody><tr><td style="border-width: 1pt; border-style: solid; border-color: rgb(0, 0, 0); padding: 5pt; font-size: 16px; vertical-align: top; overflow: hidden; overflow-wrap: break-word;">Year </td><td style="border-width: 1pt; border-style: solid; border-color: rgb(0, 0, 0); padding: 5pt; font-size: 16px; vertical-align: top; overflow: hidden; overflow-wrap: break-word;">Amount (In Rs crore) </td></tr><tr><td style="border-width: 1pt; border-style: solid; border-color: rgb(0, 0, 0); padding: 5pt; font-size: 16px; vertical-align: top; overflow: hidden; overflow-wrap: break-word;">September 2022 </td><td style="border-width: 1pt; border-style: solid; border-color: rgb(0, 0, 0); padding: 5pt; font-size: 16px; vertical-align: top; overflow: hidden; overflow-wrap: break-word;">85,009 </td></tr><tr><td style="border-width: 1pt; border-style: solid; border-color: rgb(0, 0, 0); padding: 5pt; font-size: 16px; vertical-align: top; overflow: hidden; overflow-wrap: break-word;">March 2023 </td><td style="border-width: 1pt; border-style: solid; border-color: rgb(0, 0, 0); padding: 5pt; font-size: 16px; vertical-align: top; overflow: hidden; overflow-wrap: break-word;">89,370 </td></tr><tr><td style="border-width: 1pt; border-style: solid; border-color: rgb(0, 0, 0); padding: 5pt; font-size: 16px; vertical-align: top; overflow: hidden; overflow-wrap: break-word;">September 2023 </td><td style="border-width: 1pt; border-style: solid; border-color: rgb(0, 0, 0); padding: 5pt; font-size: 16px; vertical-align: top; overflow: hidden; overflow-wrap: break-word;">97,426 </td></tr><tr><td style="border-width: 1pt; border-style: solid; border-color: rgb(0, 0, 0); padding: 5pt; font-size: 16px; vertical-align: top; overflow: hidden; overflow-wrap: break-word;">March 2024 </td><td style="border-width: 1pt; border-style: solid; border-color: rgb(0, 0, 0); padding: 5pt; font-size: 16px; vertical-align: top; overflow: hidden; overflow-wrap: break-word;">1,02,562 </td></tr><tr><td style="border-width: 1pt; border-style: solid; border-color: rgb(0, 0, 0); padding: 5pt; font-size: 16px; vertical-align: top; overflow: hidden; overflow-wrap: break-word;">September 2024 </td><td style="border-width: 1pt; border-style: solid; border-color: rgb(0, 0, 0); padding: 5pt; font-size: 16px; vertical-align: top; overflow: hidden; overflow-wrap: break-word;">1,47,081 </td></tr></tbody><tbody></tbody><tbody></tbody><tbody></tbody><tbody></tbody><tbody></tbody><tbody></tbody></table> Source: RBI data While the world continues to be riled up in multiple geopolitical crises in 2024, gold has been making merry of these tough times. Thus far this year, <keyword id="3886593" type="General" weightage="20" keywordseo="domestic-gold" source="Orion">domestic gold</keyword> prices have grown by 23%, outperforming benchmark indices like Nifty and Sensex by a mile, which have gone up by 9.85% and 8.86%, respectively. The growth in gold loan disbursal rates month on month this year could also put Nifty and Sensex’s growth to shame. In just September 2024, gold loans grew an astounding 51%, up from 40.9% in August, 30.5% in June, and just 14.8% in March. <h2 style="margin-bottom: 0.7em; line-height: 1.3; color: rgb(0, 0, 0); font-size: 24px; background: 0px 0px; text-rendering: optimizelegibility;">Hey, wait up for me, says LAS</h2>In lockstep with the elder, gold loan sibling, advances against shares and bonds have also been inching up since 2022. Data from RBI (Reserve Bank of India) notes that as of September 2022, the outstanding quantum of loans that were taken against shares (LAS) and bonds stood at Rs 7,397.94 crores. This inched up to Rs 7,764 crore in September 2023. Come 2024, and it looked like this was LAS’ time to shine. Loans swiftly skyrocketed, with outstanding loans in this category going up from Rs 8,492 crore in March 2022 to a staggering Rs 9,546 crore at the end of September 2024. Naturally, the smoke of LAS has its fire in the record inflows that Indians are pouring into the stock market and mutual funds month on month. Per AMFI (<keyword id="134904" type="General" weightage="20" keywordseo="Association-of-Mutual-Funds-in-India" source="Orion">Association of Mutual Funds in India</keyword>), the net AUM (assets under management) of India’s mutual fund industry grew to Rs 67,25,614.61 crores in October 2024, up from Rs 67,09,259.24 crores in September 2024. Even the number of retail mutual fund folios, which include equity, hybrid, and solution-oriented mutual funds, burgeoned to 17,23,52,296 in October, as compared to 16,81,61,366 in September. The same goes for stock investments in India, where the number of new demat accounts that are added every month just simply refuses to climb down. As of last month, total demat accounts in the country stood at 17.9 crore, which is more than the entire population of full-fledged nations like Japan (12.45 crore), Russia (14.38 crore), and Bangladesh (17.3 crore). In fact, since February this year, the monthly growth of LAS has been hitting double digits. From 11.3% in March to 21.6% in May to 26.8% in August, growth in LAS has been exceptional, hitting 22.9% in September this year. For context, monthly growth in the LAS segment was at a mere 5% in September 2023. <h2 style="margin-bottom: 0.7em; line-height: 1.3; color: rgb(0, 0, 0); font-size: 24px; background: 0px 0px; text-rendering: optimizelegibility;">What's driving the growth?</h2>It's a win-win for both the bank and the customer. Customers love them because LAS is available at a lower interest rate compared to unsecured personal loans. You can get a loan at an interest rate of anywhere between 9 and 12% by pledging your gold, MF units, or shares. Compare this to over 10-28% rates, which is the range where unsecured personal loans charge interest. Banks love <keyword id="827883" type="General" weightage="100" keywordseo="Secured-Loans" source="Orion">secured loans</keyword> since they are well-secured. In case you default on paying back, the bank can sell off your gold, shares, or mutual fund units to recover the amount. This takes a lot of stress off the banks, which are already dealing with secured loans’ riskier sibling-<keyword id="947940" type="General" weightage="20" keywordseo="unsecured-lending" source="Orion">unsecured lending</keyword>. High NPAs (non-performing assets) and non-payments in the unsecured borrowing space have already put RBI on red alert, which is why the apex bank is tightening the screws on unsecured lending, which was well on its way to becoming a ticking time bomb. As a result, credit growth has moderated to 12.8% YoY in October, as against the 19.3% rise recorded in the year-ago period. Yet it's not like the banks won't feel the heat. Analysts at Nomura note that <keyword id="23954457" type="General" weightage="20" keywordseo="personal-loan-delinquencies" source="Orion">personal loan delinquencies</keyword> in India that have been overdue by over 90 days rose to 5.1% in the last financial year, as opposed to just 3.9% in the year prior. <h2 style="margin-bottom: 0.7em; line-height: 1.3; color: rgb(0, 0, 0); font-size: 24px; background: 0px 0px; text-rendering: optimizelegibility;">How does it work?</h2>Both these loans work on a similar principle: Your <keyword id="857141" type="General" weightage="20" keywordseo="loan-amount" source="Orion">loan amount</keyword> is equal to a certain percentage of the actual market value of your asset. This is known as the LTV (loan-to-value ratio). In the case of gold and debt mutual funds, RBI mandates that this LTV be about 75-80%. So, for every Rs 100 of gold or debt mutual fund unit you pledge, your maximum loan amount cannot exceed Rs 80. If you pledge gold, which has a market value of Rs 10 lakh, you can take a loan of up to Rs 8,00,000. In the case of shares and mutual fund units, this limit is set at 50%. So, your shares worth Rs 5,00,000 can only get you a loan worth Rs 2,50,000. But the bright side? You can continue earning returns on your investments and pay interest only on the amount you use, since this loan works as an overdraft facility. <h2 style="margin-bottom: 0.7em; line-height: 1.3; color: rgb(0, 0, 0); font-size: 24px; background: 0px 0px; text-rendering: optimizelegibility;">Super safe, you say?</h2>Interest rates on both of these loans are very much dependent on the market value of the asset, which wildly fluctuates on a day-to-day basis. So, in case the value of your asset falls, you’ll have to keep a margin or more of the same asset in order to continue with the loan and maintain the LTV balance. Failure to do so could mean the bank can even sell off your asset. Says financial planner Nema Chaya Buch. “Yes, LAS offers easy availability of funds since these loans come with a lower interest rate as compared to personal loans. Also, you continue to earn average returns of 10–13% on your equity investments. But the downside is, in case of emergency, those pledged securities cannot be sold. Also, if the equity market goes down, then the bank may ask for additional collateral. Raghvendra Nath, MD, Ladderup Wealth Management notes that taking a LAS is best when the value of your securities has appreciated significantly. “This allows you to maximize the loan amount based on your collateral while also addressing financial needs without having to liquidate your investment portfolio. However, there are notable disadvantages to consider. The market risk is significant; a substantial decline in market value could lead to margin calls, which may incur fees and charges if there are delays or prepayments, ultimately increasing the effective cost of borrowing. Furthermore, failure to make timely payments could result in the loss of your assets.”. Umesh Mohanan, ED &amp; CEO, of Indel Money, cautions that one should have a sufficient quantity of gold to get the loan amount one wants. "According to the current RBI rules, the loan applicant/borrower can draw up to 75% of the total market value of the collateral/gold jewellery. So, always carry a sufficient quantity of gold based on one’s loan requirement. “The most important thing is that the valuation of the gold depends on the purity of the gold. If the borrower pledges gold with higher purity, such as 24 carats or 22 carats, he will get the maximum loan amount," he adds.

Secured Loans 2.0 — why more and more Indians are turning to gold, shares and mutual funds to get loans

<div type="image" title="Data from RBI suggests that the outstanding amount on gold loans has swelled from Rs 85,009 crore in September 2022 to Rs 1,47,081 crore in September 2024." msid="115250619" hostid="261" sizebytes="118350" caption="&amp;lt;p&amp;gt;Data from RBI suggests that the outstanding amount on gold loans has swelled from Rs 85,009 crore in September 2022 to Rs 1,47,081 crore in September 2024.&amp;lt;/p&amp;gt;"></div> “Ye le beta, humare khaandani sone ke gehne. Ise girvi rakhva de, shayad kuch paise aa jaye ghar main.” How many times have we seen similar dialogues repeat itself in Bollywood films of the 70s and 80s—abject poverty and a frail-looking old mother pleading to her son to pawn the family’s heirloom <keyword id="18712" type="General" weightage="20" keywordseo="gold" source="Orion">gold</keyword> ornaments to a jeweller, all to get a few bucks? Well, if you’d ask that son in 2024, he’d rather hit the loan button on his <keyword id="19977340" type="General" weightage="20" keywordseo="demat" source="keywords">Demat</keyword> account than pawn his mother’s gold jewellery. Given how Indians are rapidly resorting to taking loans against their investments in shares and mutual funds, these might as well be a cherished family heirloom in today’s time. Fair warning though; it's not as if gold and loans against it are going down in India’s lending scene. It's very much the opposite, shining brighter than ever! The secured loan category is having its time in the spotlight, and people are certainly looking beyond land and property to get their hands on some extra monies! But what is funding the steep rise behind these loans? And are they as failsafe and secure as they’re made out to be? We decode for you in this week’s Simply Put. <h2>The great Indian pawning party</h2>Pawning one’s gold has been, by far, the OG Indian financial move to get a loan. That continues well into 2024, and apparently, more so when India decides to wed and celebrate! Data from <keyword id="19899808" type="General" weightage="20" keywordseo="rbi" source="keywords">RBI</keyword> suggests that the outstanding amount on gold loans has swelled from Rs 85,009 crore in September 2022 to Rs 1,47,081 crore in September 2024. It looks like Gold took the motto of rise and shine too seriously! Table 1: Growth in gold loans <table style="border-width: initial; border-style: none; table-layout: fixed; width: 468pt;" class="redcator-table-advance"></colgroup><tbody><tr><td style="border-left:solid #000000 1pt;border-right:solid #000000 1pt;border-bottom:solid #000000 1pt;border-top:solid #000000 1pt;vertical-align:top;padding:5pt 5pt 5pt 5pt;overflow:hidden;overflow-wrap:break-word;">Year </td><td style="border-left:solid #000000 1pt;border-right:solid #000000 1pt;border-bottom:solid #000000 1pt;border-top:solid #000000 1pt;vertical-align:top;padding:5pt 5pt 5pt 5pt;overflow:hidden;overflow-wrap:break-word;">Amount (In Rs crore) </td></tr><tr><td style="border-left:solid #000000 1pt;border-right:solid #000000 1pt;border-bottom:solid #000000 1pt;border-top:solid #000000 1pt;vertical-align:top;padding:5pt 5pt 5pt 5pt;overflow:hidden;overflow-wrap:break-word;">September 2022 </td><td style="border-left:solid #000000 1pt;border-right:solid #000000 1pt;border-bottom:solid #000000 1pt;border-top:solid #000000 1pt;vertical-align:top;padding:5pt 5pt 5pt 5pt;overflow:hidden;overflow-wrap:break-word;">85,009 </td></tr><tr><td style="border-left:solid #000000 1pt;border-right:solid #000000 1pt;border-bottom:solid #000000 1pt;border-top:solid #000000 1pt;vertical-align:top;padding:5pt 5pt 5pt 5pt;overflow:hidden;overflow-wrap:break-word;">March 2023 </td><td style="border-left:solid #000000 1pt;border-right:solid #000000 1pt;border-bottom:solid #000000 1pt;border-top:solid #000000 1pt;vertical-align:top;padding:5pt 5pt 5pt 5pt;overflow:hidden;overflow-wrap:break-word;">89,370 </td></tr><tr><td style="border-left:solid #000000 1pt;border-right:solid #000000 1pt;border-bottom:solid #000000 1pt;border-top:solid #000000 1pt;vertical-align:top;padding:5pt 5pt 5pt 5pt;overflow:hidden;overflow-wrap:break-word;">September 2023 </td><td style="border-left:solid #000000 1pt;border-right:solid #000000 1pt;border-bottom:solid #000000 1pt;border-top:solid #000000 1pt;vertical-align:top;padding:5pt 5pt 5pt 5pt;overflow:hidden;overflow-wrap:break-word;">97,426 </td></tr><tr><td style="border-left:solid #000000 1pt;border-right:solid #000000 1pt;border-bottom:solid #000000 1pt;border-top:solid #000000 1pt;vertical-align:top;padding:5pt 5pt 5pt 5pt;overflow:hidden;overflow-wrap:break-word;">March 2024 </td><td style="border-left:solid #000000 1pt;border-right:solid #000000 1pt;border-bottom:solid #000000 1pt;border-top:solid #000000 1pt;vertical-align:top;padding:5pt 5pt 5pt 5pt;overflow:hidden;overflow-wrap:break-word;">1,02,562 </td></tr><tr><td style="border-left:solid #000000 1pt;border-right:solid #000000 1pt;border-bottom:solid #000000 1pt;border-top:solid #000000 1pt;vertical-align:top;padding:5pt 5pt 5pt 5pt;overflow:hidden;overflow-wrap:break-word;">September 2024 </td><td style="border-left:solid #000000 1pt;border-right:solid #000000 1pt;border-bottom:solid #000000 1pt;border-top:solid #000000 1pt;vertical-align:top;padding:5pt 5pt 5pt 5pt;overflow:hidden;overflow-wrap:break-word;">1,47,081 </td></tr></tbody><tbody></tbody><tbody></tbody><tbody></tbody><tbody></tbody></table> Source: RBI data While the world continues to be riled up in multiple geopolitical crises in 2024, gold has been making merry of these tough times. Thus far this year, domestic gold prices have grown by 23%, outperforming benchmark indices like Nifty and Sensex by a mile, which have gone up by 9.85% and 8.86%, respectively. The growth in gold loan disbursal rates month on month this year could also put Nifty and Sensex’s growth to shame. In just September 2024, gold loans grew an astounding 51%, up from 40.9% in August, 30.5% in June, and just 14.8% in March. <h2>Hey, wait up for me, says <keyword id="23953567" type="General" weightage="20" keywordseo="las" source="keywords">LAS</keyword></h2>In lockstep with the elder, gold loan sibling, advances against shares and bonds have also been inching up since 2022. Data from RBI (Reserve Bank of India) notes that as of September 2022, the outstanding quantum of loans that were taken against shares (LAS) and bonds stood at Rs 7,397.94 crores. This inched up to Rs 7,764 crore in September 2023. Come 2024, and it looked like this was LAS’ time to shine. Loans swiftly skyrocketed, with outstanding loans in this category going up from Rs 8,492 crore in March 2022 to a staggering Rs 9,546 crore at the end of September 2024. Naturally, the smoke of LAS has its fire in the record inflows that Indians are pouring into the stock market and mutual funds month on month. Per AMFI (<keyword id="20090034" type="General" weightage="20" keywordseo="association-of-mutual-funds" source="keywords">Association of Mutual Funds</keyword> in India), the net AUM (assets under management) of India’s mutual fund industry grew to Rs 67,25,614.61 crores in October 2024, up from Rs 67,09,259.24 crores in September 2024. Even the number of retail mutual fund folios, which include equity, hybrid, and solution-oriented mutual funds, burgeoned to 17,23,52,296 in October, as compared to 16,81,61,366 in September. The same goes for stock investments in India, where the number of new demat accounts that are added every month just simply refuses to climb down. As of last month, total demat accounts in the country stood at 17.9 crore, which is more than the entire population of full-fledged nations like Japan (12.45 crore), Russia (14.38 crore), and Bangladesh (17.3 crore). In fact, since February this year, the monthly growth of LAS has been hitting double digits. From 11.3% in March to 21.6% in May to 26.8% in August, growth in LAS has been exceptional, hitting 22.9% in September this year. For context, monthly growth in the LAS segment was at a mere 5% in September 2023. <h2>What's driving the growth?</h2>It's a win-win for both the bank and the customer. Customers love them because LAS is available at a lower interest rate compared to unsecured personal loans. You can get a loan at an interest rate of anywhere between 9 and 12% by pledging your gold, MF units, or shares. Compare this to over 10-28% rates, which is the range where unsecured personal loans charge interest. Banks love <keyword id="827883" type="General" weightage="100" keywordseo="secured-loans" source="Orion">secured loans</keyword> since they are well-secured. In case you default on paying back, the bank can sell off your gold, shares, or mutual fund units to recover the amount. This takes a lot of stress off the banks, which are already dealing with secured loans’ riskier sibling-unsecured lending. High NPAs (non-performing assets) and non-payments in the unsecured borrowing space have already put RBI on red alert, which is why the apex bank is tightening the screws on unsecured lending, which was well on its way to becoming a ticking time bomb. As a result, credit growth has moderated to 12.8% YoY in October, as against the 19.3% rise recorded in the year-ago period. Yet it's not like the banks won't feel the heat. Analysts at Nomura note that personal loan delinquencies in India that have been overdue by over 90 days rose to 5.1% in the last financial year, as opposed to just 3.9% in the year prior. <h2>How does it work?</h2>Both these loans work on a similar principle: Your loan amount is equal to a certain percentage of the actual market value of your asset. This is known as the <keyword id="20051485" type="General" weightage="20" keywordseo="ltv" source="keywords">LTV</keyword> (loan-to-value ratio). In the case of gold and debt mutual funds, RBI mandates that this LTV be about 75-80%. So, for every Rs 100 of gold or debt mutual fund unit you pledge, your maximum loan amount cannot exceed Rs 80. If you pledge gold, which has a market value of Rs 10 lakh, you can take a loan of up to Rs 8,00,000. In the case of shares and mutual fund units, this limit is set at 50%. So, your shares worth Rs 5,00,000 can only get you a loan worth Rs 2,50,000. But the bright side? You can continue earning returns on your investments and pay interest only on the amount you use, since this loan works as an overdraft facility. <h2>Super safe, you say?</h2>Interest rates on both of these loans are very much dependent on the market value of the asset, which wildly fluctuates on a day-to-day basis. So, in case the value of your asset falls, you’ll have to keep a margin or more of the same asset in order to continue with the loan and maintain the LTV balance. Failure to do so could mean the bank can even sell off your asset. Says financial planner Nema Chaya Buch. “Yes, LAS offers easy availability of funds since these loans come with a lower interest rate as compared to personal loans. Also, you continue to earn average returns of 10–13% on your equity investments. But the downside is, in case of emergency, those pledged securities cannot be sold. Also, if the equity market goes down, then the bank may ask for additional collateral. Raghvendra Nath, MD, Ladderup Wealth Management notes that taking a LAS is best when the value of your securities has appreciated significantly. “This allows you to maximize the loan amount based on your collateral while also addressing financial needs without having to liquidate your investment portfolio. However, there are notable disadvantages to consider. The market risk is significant; a substantial decline in market value could lead to margin calls, which may incur fees and charges if there are delays or prepayments, ultimately increasing the effective cost of borrowing. Furthermore, failure to make timely payments could result in the loss of your assets.”. Umesh Mohanan, ED &amp; CEO, of Indel Money, cautions that one should have a sufficient quantity of gold to get the loan amount one wants. "According to the current RBI rules, the loan applicant/borrower can draw up to 75% of the total market value of the collateral/gold jewellery. So, always carry a sufficient quantity of gold based on one’s loan requirement. “The most important thing is that the valuation of the gold depends on the purity of the gold. If the borrower pledges gold with higher purity, such as 24 carats or 22 carats, he will get the maximum loan amount," he adds.

You Searched For "icici bank loan rates" and got 12 results

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Secured Loans 2.0 — why more and more Indians are turning to gold, shares and mutual funds to get loans

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Simply Put: Secured Loans 2.0 — why more and more Indians are turning to gold, shares and mutual funds to get loans

Ira Alok Puranik

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