Loans to squeeze more as lending rates set to go up quickly: Banks

Home, car and corporate loan rates are likely to rise soon by up to 0.50% in tune with the hike in key policy rates by the Reserve Bank, leading banks including SBI and ICICI Bank.

The country’s largest lender SBI also welcomed hike in interest rate on savings accounts by 50 basis points.

State Bank of India chairman Pratip Chaudhuri told reporters here that a hike of 25 to 50 basis points in the next three months on the lending side is a reasonable guess and the rise in interest rates for the bank will get passed on (to customers). Click to Apply SBI Home Loan

ICICI Bank MD and CEO Chanda Kochhar said there will have 50-100 basis points (bps) impact on banks’ cost due to RBI’s announcements like a 50 bps increase in repo rate, a 50 bps hike in savings rate that will translate into a 10-15 bps hike in cost of funds for a bank, higher provisioning requirements, and transmission of previous policy hikes. Click to Apply for ICICI Home Loan

“Most banks would maintain margins. A large part of this increase will have to be passed on in the form of an increase in lending rates,” she said.

“Interest rates are bound to go up between 50-100 basis points depending on the bank. If anybody is not expecting them to go up, then he is dreaming,” HDFC Bank Managing Director Aditya Puri said. Click to Apply HDFC Home Loan

IDBI Bank Executive Director R K Bansal said the increase in lending rates could be between 25 basis points and 50 basis points, depending on individual banks.

The Reserve Bank of India hiked its repo rate by 0.50% to 7.25% besides increasing the interest rate on savings account deposits to 4% from the earlier 3.5%.

On RBI hiking the regulated rate on savings bank deposits by 50 bps to 4%, Chaudhuri said he welcomed it as it will prove to be a good incentive for those just holding onto their cash.

Chaudhuri, however, qualified the statement saying that his view is “contrary” to that of peers.

When asked of the impact on the banks cost of deposits, he said, “Encouraged by this, more people will bring in their savings money. I can visualise our average cost may come down because of the rise in savings (account).”

In order to maintain their net interest margins, Chaudhuri said, there will be a “clamour” to access low-cost funds abroad going ahead.

“Today, the gap between the Indian interest rates and all foreign currency rates is widening. There will be a clamour for ECBs, what we can’t do here, we will make up elsewhere.”

Bank of Baroda Chairman M D Mallya, who also heads the Indian Banks Association, said the issue of deregulating savings rates was not discussed during the customary post-policy meet between the RBI Governor and bankers.

On the additional provisioning norms introduced on non-performing assets, a majority of bankers said they do not see any impact on the banks’ finances as almost all banks have already achieved a high provision coverage ratio at 70 %.

“It is not going to change your provisioning substantially but whatever you have provided to achieve the 70 per cent PCR will get backed up by a proper regulatory provisioning requirement,” Punjab National Bank Chairman and Managing Director K R Kamath said.

On microfinance and the RBI’s move to largely accept the recommendations of the Malegam Committee, Central Bank of India Chairman S Sridhar said banks had largely factored in the changes but welcomed RBI’s thrust on engaging more with the ultimate borrower articulated in the policy.

SBI Chairman Chaudhuri said with investments in liquid mutual funds capped at 10% of net worth, the treasuries of banks will have to look at alternative channels of investing money.

Working with a WRS Info India Pvt Ltd.

All About the Commercial Loan Process - Real Estate Investment Tips

For an experienced SF Bay Area real estate agent visit
Like me on Facebook:
Thumbs up, favorite, share, subscribe and make a comment!

Most people who are ready to invest in commercial real estate are usually somewhat familiar with the home loan process. That’s commonly because they might have bought a home or two in the last few years and they remember the mounds of paperwork that go with it. Although there are a select few similarities, getting a loan for a commercial property is a bit different.

When you get a commercial loan for investment you have to qualify has a borrower, just like a home loan. However, there is one huge key difference. A residential appraiser values the property primarily based on other sold comparables. The primary key difference is that even though comparables are considered with a commercial appraisal, a commercial property is valued primarily off of the income it produces.

This income property makes 0k NOI. We know that based on a cap rate formula we will make 7.5% on our money with no loan on the property. However, we plan on having a loan…the question is will the PROPERTY qualify?

We check the rates and find out we can get a loan for 70% of the value at 7% interest, amortized over 25 years. We’ll have an annual debt service of just about 9k. This brings our cash flow to just a bit over k/year giving us a 5.21% cash on cash return rate. The key difference you must be aware of is the Debt Coverage Ratio, or DCR. The DCR is basically a calculation of how much of your yearly mortgage payment is covered.

Here’s the thing about investments…they don’t always work out perfectly, and banks know this. So for the bank to protect itself, it might set a HIGHER DCR for you to achieve. This way, if something happens and your income property isn’t making as much money as you thought, the bank is still covered.

We have an income of 0k before deducting about 9k/year for mortgage. We now have a DCR of 1.26, which is unacceptable to the bank. Instead, they want at least a 1.35.

Now there’s a few ways to go about this. First, we can put more money down. With another 5% down we can surpass the banks requirements and attain a 1.36 DCR. Also we could pay less for the property. The last two options would be to either get a lower interest rate, or a longer amortization schedule.

The DCR is definitely the key difference between a commercial investment loan and a home loan. However, there is still one other major difference, and that is the loan term. Commercial loans terms can vary. Because commercial properties are usually much higher in value than a home loan, the bank doesn’t want to set an interest rate for 30 years.

They have a much shorter time frame — anywhere from 3 to 10 years. Now, they might AMORTIZE the loan over 25 or 30 years, but the rate they give you is NOT SET for that long. You usually get a lower rate for a 3 year “lock in” rate, meaning for the first 3 years they cannot change the interest rate. Then you pay a little more for 5 years, 7 years, and if available 10 years. This again is when you really need to sit down and figure out what your future investment plans for the property are.

So what happens after this 3 or 5 or 7 year time frame? One of two things. The first one is that after your “lock in” time frame, the interest rate on the loan begins to “float”. What that means is that the rate can go up or down depending on the market. The second thing that can happen is that after your “lock in” time frame you will have a balloon payment. A balloon payment is a large lump sum of the remaining balance you owe that you have to pay the bank.

Lastly, there’s one key additional factor that comes into play when you are attempting to get a commercial loan, and that is the tenant leases. If you have four different tenants in a retail strip center, but they are all small mom & pop shops on a one or two year lease, lenders may be a bit hesitant. Compare that scenario to having four different, multinational tenants such as a Baskin Robbins or Sprint store on a 7 or 10 year lease, and banks would feel MUCH more comfortable with the latter.

When you are finally ready to start the commercial loan process, be sure to check with your lender or bank and see what is the common DCR range for the type of property you are thinking about buying. Also, be prepared for the TYPE of loan they offer you — be it one with a balloon payment or one with a floating interest rate. Again, being prepared from the start is the best way for you to ensure make the most of your investment …now that’s good to know.

Contact Davide Pio Today | SF Bay Area Real Estate | 510-815-2000

Find More Lending Tree Loan Rates Articles