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Govt asks banks increase tenure of loans, not EMIs

EMIs have gone up by around 15% over the past few months

Worried over the impact of rising interest rates on borrowers, the government has asked all public sector banks to increase the tenure of loans instead of raising EMIs.

"The Finance Ministry has written to all banks to increase tenure in the light of rising interest rates," official sources said. This will help in not increasing the burden of EMIs on borrowers and mitigate the possibility of default, sources said.

Banks have taken actions accordingly.

The nation's largest lender SBI and other public sector lenders like Vijaya Bank said they have already been doing it as they felt that there was a room for possible delinquencies as interest rates started pinching borrowers more and more. They also said that they have received the letter from the Finance Ministry some days ago.

"We have already been doing it, in fact much before the Finance Ministry wrote to us suggesting to increase the tenor of EMI-based loans instead of raising the repayment amount as a prudential measure to avert possible defaults by our borrowers," SBI deputy managing director and chief credit & risk officer AP Verma told PTI on the sidelines of a Ficci-IBA banking summit.

Vijaya Bank chairman and managing director HS Upendra Kamath too concurred saying his bank has already been doing it as a prudential tool to avert any possible defaults. Similarly, United Bank of India chairman and managing director Bhaskar Sen too said he is looking at tweaking the loan period instead of increasing the repayment amount. "There are rising risks to the assets, especially from the SMEs and the retail sector and that we may look at increasing in the tenor of the loan than increasing the EMIs," Sen said.

When asked how long the tenor can be increased will, SBI's Verma said, there is no maximum tenor of a loan as it depends on the age profile of the borrowers. However, it can be noted that there is an unwritten rule at all the banks that caps the repayment period to the working age of the borrower.
Verma also said it is up to the borrower to decide to elongate the tenor or pay more, as increasing the tenor only lessen the burden now and not in the real sense. The 26 public sector banks account for over 70% of the banking market. The government move comes in the wake of banks passing on the interest rate hike by the Reserve Bank to the borrowers.

It can be noted that as core inflation remained highly sticky at much above the comfort level of the central bank, it has in the past 15 months increased its key policy rates (short-term lending rate or repo) by a record 11 times or by 4.25 percentage points to batten down inflation, which stood at 9.22% in June.

It is estimated that EMIs have gone up by around 15% over the past few months, burdening. Though the private sector lenders have not been asked, it has been learn that already the two largest players ICICI Bank and HDFC Bank are already giving this option  to their borrowers, it is learnt.


Credit offtake up by 20%, deposits 18%

Deposits went up to over Rs56.44 lakh crore till 12th August this year, against Rs47.83 lakh crore as on 13 August 2010, clocking a rise of 18%

Credit offtake from banks grew by 20.3% to over Rs41 lakh crore during the one-year period ended 12 August 2011, suggesting an upswing after a brief period of moderation.

According to data from the Reserve Bank of India (RBI), credit offtake during the period stood at Rs41.73 lakh crore against Rs34.67 lakh crore in the same period of the previous year. The latest rise signals a renewal in investments and industrial activity.

Meanwhile, deposits went up to over Rs56.44 lakh crore till 12th August this year, against Rs47.83 lakh crore as on 13 August 2010, clocking a rise of 18%. In its first quarterly monetary review last month, the RBI had said that credit growth was likely to slow down as a result of the recent rate hikes.

The RBI said credit growth would be 17%-18% this fiscal, against the earlier projection of 19%, while deposit growth has been pegged at 17%. During 2010-11, bank credit had increased by 21.5%, while deposits grew by only 15.5%.

India Inc has also complained that frequent rate hikes have resulted in slowing down of investments and industrial growth. While industrial production recorded a dismal growth of 5.9% and 5.6% in April and May, respectively, it went up by 8.8% in June.

The RBI has hiked its key-policy rates three times this fiscal, and 11 times since March 2010, to curb inflation.


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