Thursday, December 16, 2010

Loans to get costlier in 2011

MUMBAI: Get ready to shell out more in EMIs as banks are expected to raise lending rates next month despite the RBI on Thursday opting against a hike in policy rates and injecting Rs 48,000 crore into the financial system.

With inflation continue to haunt policymakers, the RBI—which stuck to its earlier promise of pressing the pause button for the moment —is expected to add to the pressure on banks by increasing rates when it presents its next monetary policy review towards the end of January. The RBI had opted for six rate hikes in 2010 to help moderate inflation.

In its mid-quarter policy review released on Thursday, the RBI, however, opted to focus on addressing the cash crunch or the tight liquidity in the system.

To begin with, it has lowered the proportion of liabilities that banks have to mandatorily invest in government bonds from 25% to 24%. In addition , the central bank announced that over the next one month, it will directly buy government bonds, which are usually auctioned, to ensure that cash is not sucked out from the system.

The two moves are expected to help banks service the demand for loans. With the pace of accretion of bank deposits being lower than the growth in loan disbursements , banks are finding it tough to meet their fund requirement and have been borrowing over Rs 1 lakh crore through RBI's overnight fund window, known as repo.
Bankers said that RBI's moves are going to provide temporary relief and repo borrowings are going to remain in the region of Rs 70,000-80 ,000 crore, above the central bank's estimate of Rs 50,000 crore or so.

The funds crunch-—which will worsen this week due to over Rs 40,000 crore going out of the monetary system for payment of taxes—has forced banks to raise deposit rates.

Read more: Loans to get costlier in 2011 - The Times of India http://timesofindia.indiatimes.com/business/india-business/Loans-to-get-costlier-in-2011/articleshow/7115219.cms#ixzz18LFMzX7P

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