Aggressive banks caught up in festive spirit  

October 3, 2009

The festive season brings with it all sorts of attractive offers for consumers. Banks, not ones to be left behind, have come out with their own offerings, much to the pleasure of the consumers. Almost all leading banks have slashed interest rates on home and auto loans, in a bid to capture the likely demand during the festive season. SBI started the price war in the car loan segment in late June when it slashed rates to 8% for the first year and 10% for the next two years. Axis Bank recently upped the ante by slashing loan rates by 150-200 basis points to 8.5% on loans taken between October1 and December31. Following this, Kotak Mahindra Bank and HDFC Bank also cut rates by around 50 basis points. IDBI Bank has also recently cut its new home and auto loan rates by 25 to 50 basis points. As part of its festive offer, it will charge 8.5% for loans taken between October1 and December31.

The competition is heating up in the home loan segment too. SBI took the lead in August when it announced that loans up to Rs5 lakh would be offered at a fixed rate of 8% for five years. It also offered to charge 8% for the first year on loans up to Rs 50 lakh and cap them at 8.5% in the second and third years. IDBI Bank has also slashed home loan floating rates by 25-50 basis points. Under the new scheme, rates for home loans up to Rs 30 lakh will be 8.75% as against the existing 9%. Bank of India, ICICI Bank and Union Bank have come out with their own versions of sweet deals.

While consumers are rubbing their hands in glee, banks may have to bear the burden of reduced margins. For, while interest rates on advances have been revised downwards, the cost of funds for banks is not letting up at the same pace. Adding to this are the overheads and loan delinquencies which further erode banks’ profitability. Already, several banks are reeling under squeezed margins. The reported NIMs for banks like SBI, Bank of Baroda and Union Bank in the June quarter were as low as 2.3%-2.4%. Chanda Kochhar, MD and CEO, ICICI Bank believes that such irrational pricing doesn’t make economic sense. Speaking to Moneylife, she said, “I hope that as the credit demand picks up, this irrational pricing should disappear. Today people are doing irrational pricing as there is excess liquidity. NBFCs too were contributing to irrational pricing. For them too the cost of funds would go up. We are clear at what point it makes economic sense to do business.”

This raises questions regarding the sustainability of low loan rates in the near future. While the downward revision may work well for banks in the short-term, they will eventually feel the pinch of high cost of funds. – Sanket Dhanorkar [email protected]