PSU banks cut rates on retail loans, but you should be wary

There is much more to the festive season than lights and cheer, since this season is also when shopping peaks. Right from cars, two-wheelers, digital TVs to XBoxes, smartphones, you name it. And, keeping the forthcoming festive season in mind, a number of Public Sector (PSU) banks have cut lending rates for various retail loans.

Sample this:

The State Bank of India (SBI) reduced its auto loans to 10.55 percent from 10.75 percent. The bank has also slashed its processing fee from 0.51 percent of the loan amount to a flat fee of Rs 500. Customers who have a salary account with the bank can now get consumer durables and two-wheeler loans for a starting interest rate of 12.05 percent. These new rates are valid till January 31.

Corporation Bank Ltd announced that its consumer durables loan gets a generous rate cut from 12.25 percent to 10.50 percent.Punjab National Bank also cut its rates on car loans, the new rate stands at 10.65 percent.While Oriental Bank of Commerce’s new rates stand at 12 percent. Both these banks are already offering home loans at their base rate, so a future cut on home loan rates is not an option for PNB and Oriental Bank of Commerce.

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IDBI bank Ltd has also slashed its auto loan rate, and new rates stand at 10.25 percent. The bank also cut home loan rates which now stands at the bank’s base rate of 10.25 percent.

Dena Bank Ltd has a home and car loan combo deal where home loan will be a 10.25 percent while car loan would be 11.75 percent. While the bank’s corporate salary account holders would get consumer durables at a discount of 100 basis, at 12 percent.

All these rate cuts have been announced in the last few days, not only due to the forthcoming festive season, but also a result of instructions from the Ministry of Finance to PSU banks to offer lower interest rates to kickstart sales in the automobiles and consumer durables sector, in the hope of reviving a slowing economy. Of course, festive season is a good time to shop; after all there are festive discounts from manufacturers and retailers. And now with credit available at lower rates, you have all the more reason to go all out.

But the question is, should you just because you are getting lower rates?

If you see the western world, Christmas shopping is always about awesome discounts and cheap credit, but it puts millions into a debt trap. The lethal combo of deep discounts and cheap credit is here to tempt us too.

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What’s really funny is that on the one hand, the ministry is asking banks to cut rates on consumer loans, on the other hand just last month, RBI had banned banks from offering zero percent EMI schemes through credit cards. RBI said in its circular, “In the zero percent EMI schemes offered on credit card outstanding, the interest element is often camouflaged and passed on to customer in the form of processing fee. Since the very concept of zero percent interest is non-existent and fair practice demands that the processing charge and RoI charged should be kept uniform product/segment wise, irrespective of the sourcing channel, such schemes only serve the purpose of alluring and exploiting the vulnerable customers.”

Yesterday, the Reserve Bank of India Deputy Governor KC Chakrabarty on the sidelines of Kotak Bank’s 1000 ATM inauguration event, told Firstpost, “It’s during the festive season that mis-selling is at its peak, so wrong things should not happen when more people come (to buy). There is no ban on giving loans on credit cards. What we are saying is don’t charge customers more percent by saying zero per cent,” He further added, “Don’t give loans to people by luring them with lower interest.”

Clearly the apex bank is concerned about customers getting fair deals on credit cards. But with PSU banks lowering rates, especially with consumer durables and auto loans, there is a good possibility that others may eventually follow suit. Which could result in two things. One, customers could get lured by lower rates into buying things they cannot afford. And, in the process the banks may also get a large number of bad borrowers.

Uday Kotak, Vice-Chairman and Managing Director, Kotak Mahindra Bank, said at the Kotak bank invent that lowering interest rates should be done with responsibility. “We want to offer rates which the customer wants and also can afford.”

Remember, during the festive season every item in the market, every advertisement on television, on radio and in the newspaper and every bank with a lower interest rate is competing for every rupee in your pocket. While there is a good possibility that the deals are really discounted and rates on loans are really low, the question you have to ask yourself is, if you want to celebrate the festival by taking on debt?

Call us party poopers, but keep this personal finance thumb-rule in mind: Ideally your debt-service ratio (loosely put your total monthly EMIs obligation amount / total monthly income) should not be more than 30-35 percent. The maximum debt to service ratio you can have is 40 percent. Any thing more than that is definitely a red flag. So before getting lured by lower interest rates on loans like consumer durable loans and auto loan, look into your individual financial situation, or you might just bite off more than you can chew.