Who gains, who loses


Reserve Bank of India recently announced a cut in repo rate by 25 bps to 7.75 per cent. This move will effectively mean a reduction in bank borrowing rates. However, it will also lead to a reduction in deposit rates because banks have to adjust margin-spreads, thus translating into lower earnings for depositors, pensioners and people dependent on a fixed income from bank securities, writes

The rate cut by banks across the country effective from April 13 will be the biggest game changer for growth because for every basis point decrease, there will be a corresponding decrease in all interest rates as it is linked to the base rate. Reserve Bank of India governor Raghuram Rajan has surprised banks with its cut in repo rate by 25 basis points (bps) to 7.75 per cent it will lend to banks with immediate effect. This move had set the tone for lowering of banks’ base rates.

However, RBI has not mandated the banks, in fact it has prompted the banks and some leading banks, both private and public sector, to bite the bait. This is bound to spur the economy, and was reflected in the stock market by a 3 per cent increase on good market sentiments.

This means a point 50 per cent reduction in the base rate is ultimately reflected in the borrowing rate by the company. Cost of funds will come down and profit will proportionately go up. It means customers’ cost of borrowing goes down by point (.) 50 per cent. This available surplus adds to his bottom line. How this is going to affect the Goan economy is to be seen.

Take a simple example: in the case of a SME unit having a small borrowing limit of Rs 1 crore with a point 50 per cent cut in his borrowing rate, means a saving of Rs 50,000 a year. And if it is Rs 10 crore it means savings of Rs 5 lakh a year. Most SME units operating, let’s say in the Verna Industrial Estate, would be having a borrowing limit in excess of Rs 10 crore. Any rate cut means a substantial savings in fixed outgoings.

Now there is a flipside, says a financial consultant wishing anonymity. For every reduction in the base rate there has to be a reduction in the corresponding deposit rate because the banks have to adjust the margin-spreads. This in turn translates into less money in the pocket of the depositor, so this is going to hurt all domestic savings, pensioners and all persons dependant on fixed income from banks securities.

In an economy like Goa, where the CD ratio is abysmal and centered more towards deposits rather than advances, the average Goan has more to lose than to gain. Ultimately, the average Goan tends to lose. The average Goan is a depositor and not a borrower. He stands to lose immediately between point 15 per cent to point 20 per cent on his interest income. This will adversely affect senior citizens, household and pensioners who are dependent on Interests Incomes and have no other source of livelihood.

In this scenario, retail borrowers have something to cheer about. The home loan buyer and the car loan buyer will be gleeful. Especially for the home loan, the net result will be substantial savings in the long term.

The businessman on the other hand has to ensure that the rate cut is passed on to him. At the moment the rate cut is just point (.) 15 to point 20 per cent but a point 50 per cent cut is just a matter of time. By the looks of it, it seems that we are headed for a low interest monetary policy regime.

In the changing scenario, of lower interest rates the average Goan will have to look at mutual funds and the equity market which has been largely ignored by the common man. Direct equity is for the strong hearted by mutual funds is easily accessible and has given handsome returns in the last one year with most funds averaging in the 40 per cent range.

Canara Bank Emerging Markets fund was the topper with whopping returns of about 104 per cent. With such competing avenues for investments banks will have to rethink their strategies and realign their products, especially since all banks have their own mutual fund products and the same are sold alongside on the same counter in the branches

Some bank managers say they are still in the process of a rate cut as they are under pressure on net interest margin.

SBI targets women

Let’s check out what banks have to spur growth. SBI says it is targeting women borrowers. For males, a car loan rate is 0.45 per cent above the base rate that will be 10.30 per cent interest. Whereas for women, it will be 0.40 per cent above the base rate which is 10.25 per annum.  The lowest in the industry, says a SBI official.

SBI attractive schemes are Max Gain, Her Ghar and SBI Yuva for young adults age 18 upwards. There are also other schemes like SBI Reality and SBI PAL.

BoM offers free accident insurance

“All rates are dependent on base rates. Every bank must declare their base rate according to Reserve Bank of India’s policy,” says Margao branch Bank of Maharashtra (BoM) chief manager SJ Karegaonkar, adding, “no banks can lend below the base rate.”

Now is the time for industries to take advantage, especially the small and medium scale sectors and traders too. BoM has lowered its base rate to 10.25 per cent from 10.40 per cent. “We have some attractive schemes for traders and for the service sector,” he says. “We offer loans against property where financial norms are relaxed a bit for cash credit limit which is normally available up to 20 per cent of the turnover and under this scheme we give 25 per cent of the turnover.”

For high net worth individuals, the bank has launched ‘Purple Scheme’ under which customers get free road accident insurance cover of Rs 10 lakh and air accident insurance of Rs 56 lakh free. Goans should now venture into environmental-friendly business such as fish processing units, cold storage for vegetables and non vegetables items and other agro-based industries.

The process of a rate cut is being worked out in Canara Bank and will be announced any time, says an official. Its present base rate 10.20 per cent.  In emerging equities, Canara Bank mutual fund returned a rate of 104 per cent which was the highest in the industry. Claiming to be the number one bank in Goa, Canara Bank is expecting a growth rate of 20 per cent in the ensuing year.

IDBI’s priority women

IDBI says it offers a special savings account for women. Women customers can now enjoy a boutique of features such as no changes for non-maintenance of AQB, exclusive women debit card, two zero balance kids account free, 25 per cent discount on lockers rent, and higher limits on ATM withdrawal among others.

The wait for lower equated monthly installments (EMIs) is finally over, says economist and industrialist D Kumar Pillai. He said that this measure would not only give a good fillip to Goa’s economy, but will bring down the cost of capital for our industries wishing to expand. For SMEs and sunrise industries there are lots of government incentives waiting to be tapped. “Although we welcome the rate cut by RBI by 25 bps, this should reduce lending rates by banks. Unfortunately, banks are reluctant to do this. Proper monitoring and enforcement by RBI will ensure desired results,” said Pillai who is also the vice-chairman of Goa Management Association.