A couple of days back the Indian stock markets reacted sharply to the RBI's interest rate policy. The fact that companies will now have to pay more to borrow did not go well with investors. Possibility of higher payments for existing loan was even more worrying. This had the potential to dampen the profit growth for companies over the next few quarters. Their inability to borrow more would also hamper their near term growth prospects.
But little thought was spared for the retail borrowers who had seen their interest payouts shooting up in the recent months. In case of most individual borrowers, the equated monthly installments (EMIs) payable have shot up by 30% to 40%. For ones nearing retirement these may have shot up by as much as 50% to 100%. This is because the latter have no room for lengthening the tenure of the loan. Who better to comment on the status of individual borrowers than ex ICICI chief Mr K.V. Kamath? According to the veteran in retail lending, the risks have soared in this space over the past few months. So much so that banks now need to get wary of higher NPA risks in retail space.
The retail investors blame greedy banks for their plight. The bankers accuse RBI of being too conservative with its monetary policy stance. The RBI finds the US Fed guilty of pumping in hot money into developing economies and fuelling inflation. And so the blame game goes on.
We do agree with the RBI on the fact that the necessity of higher borrowing rates stemmed from the US' callous money printing. However, the responsibility lay on our own banks to ensure that the retail borrowers are not misled by low interest rates.
If one bank chooses to offer dirt cheap rates on home and car loans to utilize its surplus float, others follow suit. This is certainly the very nature of a competitive market. However, if banks compromise margins to gain market share and in the bargain also mislead retail borrowers, the same is best avoided.
We believe that central banks in the US or Europe cannot be blamed if NPA ratios in Indian banks are to rise in coming days. It is for our banks to ensure that individual borrowers keep their EMI obligations well within their comfort limits.