Rate hikes leave borrowers a worried lot

By Yogesh Mehendale

Mumbai

Aug. 1: Naresh Kamath who took a loan of Rs 20 lakh for the tenure of 20 years, will now have to pay an extra Rs 1,043 per month as EMI.

A media person, he is worried about how he will rustle up this extra amount. Earlier he was paying the EMI of Rs 21,329 per month at the rate of 11.50 per cent. Now the new rate applicable is 12.25 per cent as interest rates have been hiked by .75 per cent which come to an extra Rs 1,043 per month.

RBI had on Tuesday increased key rates to contain inflation and HDFC and ICICI were among the first to hike their loan rates. Experts say two digit inflation will remain till end of this financial year, so the next six to eight months seems to be tough for the middle class borrowers and those with fixed incomes as rates could be hiked again.

However, Mr Prasad Sharma a wise consumer says he will pay the lump sum amount and get rid of his burden of increasing EMI. Mr Prasad who work for a BPO and had taken a home loan for around Rs 19 lakhs has decided to liquidate other less paying investments and reduce the home loan amount. Also there are consumers like Mr Deepak who has taken a home loan from the Bank of India, which has not yet increased the interest rates. Officials from BoI said they have decided to wait and watch.

The thumb rule is that for every Rs one lakh loan amount, in the case of a 0.25 per cent hike for a 20-year loan, the EMI will go up by Rs 17, and in case of a 0.50 per cent hike, the EMI will increase by Rs 34 and in case of 0.75 per cent hike, the EMI will rise by Rs 51.

Apart from the home loan, auto loans and personal have loans also become costlier. These personal loan rates are given in a range of 18 to 19.5 per cent.

This segment also will suffer in the coming months. Banks are suggesting to their clients that they can opt for increasing the tenure of the loan repayment by keeping the EMI at current level. But the worst is not over for personal and home loans. Interest rate hikes are an outcome of inflationary pressure, which in turn are mainly due to high input costs and inflated crude prices.

Though the RBI and the government have said that by end of March 2009 inflation will be contained at the level of seven per cent but some economists don’t agree.

Ms Rupali Rege-Nitsure, chief economist, Bank of Baroda said, "Inflation will remain in double digits till March 2009. And even by the end of March inflation would not come below nine per cent. High cost of inputs, such as steel, crude, food etc. are the prime reasons behind inflationary pressure and high interest rates, she said.