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Updated: April 17, 2012 23:48 IST

RBI brings cheer to common man

K. T. Jagannathan
Comment (8)   ·   print   ·   T  T  

The policy fixes the potential trouble spots in the banking system

For the first time in two years, the Reserve Bank of India (RBI) has brought direct cheers to many a common man on the streets.

The cut in the short-term repo rate (the rate at which the RBI lends money to commercial banks) by 50 basis points to 8 per cent from 8.50 per cent has set the stage for a drop in interest rates on home and car loans. Banks have already gone into a huddle mode to work out their rate cut strategy.

While borrowers can have a sigh of relief, senior citizens who rely on interest income from savings deposits for their living may feel a sense of let down. Not long ago, banks vied with one another to hike short-term deposit rates. If the benefit of the RBI action has to percolate down, the deposit rates need to be aligned with the new reality. Re-adjustment of deposit rates will have to happen sooner than later if banks were to heed the RBI signal and cut the lending rates. Though the RBI has punctuated the rate cut with clear cut warning on the persistent ‘upside risk' to the economy, the move is sure to perk up the sentiment all around.

The Monetary Policy Statement of 2012-13 also has some significant common man-centric initiatives. The high interest rate regime has seen home loan takers shelling out more every month. As though this isn't enough, banks put hefty penal charge for pre-closure of loans. The apex bank has now said that there cannot be any foreclosure or pre-payment penalties on home loans extended on a floating interest rate basis. A penal charge on pre-closure of a floating rate loan is simply unexplainable.

At a time when personal banking has gone mostly impersonal, thanks to the invasion of technology, the RBI has asked banks to offer a “basic savings deposit account” with certain minimum common facilities. This should be done to all customers without insisting on the need for a minimum balance. The RBI has also advised banks to initiate steps to allot unique customer identification code number to all customers.

These three indeed are direct-impact initiatives and go a long way in beefing up customer confidence in the banking system.

Gold loans under lens

The surge in gold loan continues to worry the monetary managers. The RBI recently put restriction on non-banking finance companies (NBFCS) by insisting that their loan-to-value ratio cannot be more than 60 per cent. They move was seen as bid to reign in unbridled growth in gold loan. Gold loan companies such as Manappuram Finance, Muthoot Finance and the like have come under the watchful eyes of the apex bank. Reiterating its concern over significant increase in gold loans by NBFCs in the recent period, the RBI has asked banks to pare their regulatory exposure to a single NBFC (having gold loans to the extent of 50 per cent or more of its total financial assets) to 7 per cent from the existing 10 per cent of their capital funds. Also, the apex bank wants banks to have an internal sub-limit on their aggregate exposure to such aforesaid NBFCs taken together.

Working group on gold

Significantly enough, the RBI has decided to constitute a working group to do a detailed study of gold demand, trends in gold prices and lending by NBFCs against gold. Simultaneously, it has announced its intention to come out with a draft guideline on the regulatory framework for NBFCs by June-end on the recommendations of the Usha Thorat Working Group.

More than the rate cut, the latest policy statement of the RBI is marked for its no-nonsense approach to fix the potential trouble spots in the banking system.

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It may be a good news for common people but can't supersede the place of
common needs in this price hiking scenario in our daily life . It seems
to be obnoxious to say this will be a great opportunity for a common
people to incendiary their happiness .

from:  Sri Krishna Chaitanya
Posted on: Apr 18, 2012 at 12:42 IST

It's reassuring to see the RBI doing a great job in mitigating risks on all fronts. The strong moves made by RBI in order to keep the economy stable are indeed comendable and something we should be thankful for. The sheer farsightedness of the RBI if combined with some bold moves by the GOI will surely bring the growth rates back to the pre-crisis period.

from:  Nikhil V
Posted on: Apr 18, 2012 at 12:03 IST

it will be a mile stone in direction of banking services reform and will
make this banks people friendly,impact of RBI policy will be on housing
sector, NBFC and may up to some extent reduce gold price by restricting
loan on gold deposit by NBFC.

from:  Nitish kumar
Posted on: Apr 18, 2012 at 10:52 IST

Gold is obviously has been the enemy of fiat currency and so naturally
an enemy of central bankers.Because gold is a honest money and nobody
in this world can counterfeit gold(i.e, a real preserver of
wealth).Gold use should be promoted in India as hedge against rupee so
that even if the union govt goes bankrupt,the people of India would be
saved from its consequences.Gold should be promoted as a competitive
currency to rupee.Gold had a monopoly in India until 150 years ago.And
the public will be saved from ill effects of a fiat currency.Gold will
also save us from boom and bust cycles and a reduction in mal-
investment.We as a country should shed the idea that wealth can be
created by inflation.Wealth is only destroyed by inflation.

from:  Satish
Posted on: Apr 18, 2012 at 10:12 IST

RBI says they are lowering the interest rates because the economic
outlook warrants it.The fallacies in their reasoning would be amusing
if they weren’t so dangerous. The RBI wants to keep the price of money
low to boost the economy. But the boost they are attempting won’t get
here for another three years. That’s not a recovery. And we’ve already tried this tactic. That’s how we got into this mess in the first place: with interest rates artificially low for a very long time. Free money doesn’t stimulate growth, as Japan’s two lost decades clearly show. Artificially low interest rates only serve to punish saving, distort market signals, and cause further malinvestment. They also do nothing to address the only real solution to our economic woes: liquidation of the bad debt that hangs around the neck of the world’s economy, preventing recovery. The cost of borrowing money should be the equation between savers and
borrowers.If there is less credit in the market then the interest
rates should be increased to attract the savers to save more money so
that the demand for credit can be met.If they are too many savers and
no demand for credit then the interest rates should be low.The only
way the Reserve bank is going to keep the interest rates low is by
monetary easing(inflating money supply i.e, inflation) which will
further devalue the rupee and prices will go higher.The artificially
low interest rates will create boom and bust cycle and will lead to
mal-investment in housing market.The special privileges granted to
housing loans will distort the housing market by allowing them to
attract capital they could not attract under pure market
conditions.Like all artificially created bubbles the boom in housing
prices cannot last forever.When housing prices fall,Homeowners will
face difficulty as their equity will be wiped out.

from:  Satish
Posted on: Apr 18, 2012 at 08:25 IST

My comments are that of an old senior citizen and not of an economist operating at stratospheric theories on Economics. How come Post Office and Bank deposits were paying interest for a long duration, less than the rate of inflation?
How come Banks were lending (atleast to the medium and large corporates )at rates lower than the rate of inflation? Was not the deposit making citizens and the system bleeding and losing wealth?
Now, this half a percent reduction is supposed to do wonders.
A a set of PSU banks very recently increased the rate of interest on deposits of terms upto 2 years. Is it that the Banks were misguided or is that RBI'S action my not yield the desired results? Or is it that both are right and there could be a convergence in thought and theory a lay man can't fathom? My worry is we may be heading again to the days of inflation rate being higher than rate on deposits.
RBI'S action may only aid and quicken that process.

from:  N Nagarajan
Posted on: Apr 18, 2012 at 08:01 IST

Relief at last! Light at the end of the tunnel.

from:  Deepak Vijayakumar
Posted on: Apr 18, 2012 at 06:03 IST

Its not a cheer! if the rates would have remained high, the common man
would postpone his purchases and say real estate prices would cool
down. Rates should be cut only after the prices cool down drastically.Even in the case of food, the inflation has never come down. Secondly, bank deposits are quite low. Banks are in a worrisome position with high loan to deposit ratio so they would keep the interest rates high to attract more deposits, and so along with it the loans will not be made cheaper so soon.
Thirdly, with govt fiscal deficit increasing so much, they'll tend to borrow so much which will leading to crowding out effect, pushing interest rates upwards.
Just to satisfy the institutional money bankers, fund managers, top honchos who take away all the wealth from the common man, the RBI has cut 50bps. And now they are planning to increase the petrol, kerosene prices. Is there anything good for the common man here?

from:  Pritish
Posted on: Apr 17, 2012 at 23:47 IST
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