Almost everyday we wake up to the news that RBI has begun easing liquidity in the financial system. Over the last few weeks, it has reduced the CRR by 50 basis points or 0.50 per cent, thereby infusing liquidity to the tune of Rs.35,000 crores into the banking system. As we all know, CRR is Cash Reserve Ratio, a percentage of amount that all banks will have to deposit with RBI as per the rates prescribed by the central bank from time to time. While higher CRR levels will mean banks will have lesser funds at their disposal, lower levels will mean the banks will have more funds with them to lend.
Increasing and decreasing the CRR is always linked to the inflation rates. Higher the inflation higher will be the funds that banks will have to park with the RBI that would make banks to struggle for liquidity which would affect credit growth that includes slowdown in important sectors such as automobile, real estate and manufacturing.
Attracting new customers
After Rs.35,000 crores were eased into the financial system, banks have begun to smile again. That is reflected in the slew of offers being made by most banks who are leaving no stone unturned to attract new home loan customers. An innovative offer has been from Federal Bank, a Kerala-based private bank, which has, for the first time in the country, is offering a loan for housewarming ceremonies. One can surmise the effect of easing liquidity when we witness such out-of-the-box offers. The private sector Axis Bank recently announced that the last 12 EMIs would be completely waived for those customers prompt with their repayment. ICICI Bank has offered one per cent cash back on every EMI for the entire loan tenure. A few PSU banks have reduced the processing fee to attract new home loan seekers. Other banks too have already reduced interest rates from 12 to about 10.50 per cent over the last few months. Since the banks will have to utilise the funds available at their disposal (cut in CRR) it is but natural to expect such offers.
Since it is expected that RBI could ease the key interest rates in its January 2013 monetary policy it is recommended to go for the floating rate option.
