Will the banks lower the home loan rates??

The finance minister, P Chidambaram’s barely-veiled hint to banks to lower the Home loan rates up to Rs 20 lakh is distressing for a variety of reasons. Notably because it suggests the government is determined to continue with the process of emasculating the banking system; a process set in motion with the farm loan waiver.

For votaries of financial sector reform — and the prime minister and the FM could once be counted among them — it is as if the clock has been turned back and the painstaking progress in moving towards a competitive banking system wasted.

The objective of the 1991 Narasimham Committee report on financial sector reform was to liberate the banking sector from the shackles of the command and control regime of the pre-reform days. And, barring a few hiccups, successive governments had followed its broad agenda. Till now, that is. The tragedy is that this is happening under a reformist prime minister and finance minister.

Many would also question whether it is in order for the FM to tell banks to lower interest rates so people could refinance their businesses, that too for housing loans that can by no means be considered ‘small.’

Moreover the rate charged by individual banks depends on their cost of deposits and business mix. As far as the signaling rate of the RBI is concerned, the key consideration is its outlook on the inflation front. With oil at $106 a barrel, other commodity (especially foodgrains) prices rising globally and inflation as measured by the wholesale price index rising for the fourth successive week, it is evident inflationary pressures have not abated. In any case, interest rates are the RBI’s call. It would have been best, therefore, if the FM had trodden a little warily.