The government has moved in to help lower the burden of rising interest rates on retail borrowers. It has asked public sector lenders, which account for around 70% of the market, to give borrowers the option to increase the tenure of their loans and not raise the equated monthly installment (EMI).
Sources said that the finance ministry recently wrote to banks asking them to offer this option to retail borrowers burdened by repeated increase in interest rates that has pushed up EMIs by around 15% over the last few months.
The Reserve Bank of India has raised key policy rates 11 times since March 2010 to tame inflation that is already straining household budgets. Though private sector lenders would not be directly impacted by the government advisory, they too would be forced to come up with a response to prevent borrowers from opting for a more comfortable repayment option.
The move comes at a time when several borrowers were being asked by banks to increase their EMIs as they had exceed the maximum 20-25 year repayment term for most banks. For someone who had borrowed Rs 50 lakh at 9% for 20 years, the EMI worked out to Rs 44,985. But with rates rising to 10.5% or thereabouts, the installment, keeping the tenure constant now works out to Rs 49,919 a month, which represents an increase of 11% in a span of 15 months or so.
If the borrower wants retain the EMI at Rs 44,985, he only has the option to increase tenure to 413 installments or 34-and-a-half years, which most banks are unlikely to provide. Apart from everything else it would roughly equal the working life of most borrowers.
But with the government advisory banks would be more amenable to increase the term though not to over 34 years. The flip side is that the interest burden, which would have been around Rs 58 lakh with a 240 month term would rise to Rs 1.36 crore if the tenure goes up to 34 years.
"It is in the borrower's interest to stick to a shorter term so that the principal amount keeps decreasing. So, unless you are absolutely strained for funds, it is advisable to increase the EMI," said a banker. The finance ministry missive to banks is the first since Pranab Mukherjee came to North Block.
Though the government has tried to argue for a more comfortable interest rate regime on the grounds that growth should not be sacrificed, after taking asimilar line initially, RBI has gone for sharp rate hikes in recent months.
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