- Date : 04/11/2020
- Read: 4 mins
Contemplating buying a house or a car in the wake of the COVID-19 pandemic? Read on for these retail loan-related considerations that you absolutely must know.
Retail loans are characterised by competitive interest rates and comfortable repayment periods. The retail loan market in India comprises housing loans, car/two-wheeler loans, education loans, personal loans, and overdrafts against immovable properties. Banks get a major chunk of their business from these retail loans and do not shy away from competing with fellow lending institutions.
In 2020, the COVID-19 crisis completely changed the economic scene, not just in India but the whole world. People and businesses faced an unforeseen scarcity of money, construction projects stalled because of the lack of liquidity and the dearth of migrant labourers, automotive production lines faced a massive dip, and the education sector is still not out of the lockdown doldrums.
All this, combined with the government’s COVID-19 measures, has led banks to lower their lending rates. This should motivate risk-averse retail buyers to loosen their purse strings. It could be an extremely good opportunity for buyers to build assets – which, in turn, will steady the staggering economy.
The lowered retail loan interest rates have also seen peripheral impacts, such as ease of borrowing and flexible eligibility. On the other hand, options like moratorium have come up as a parallel effect of the pandemic. While applying for a retail loan, the borrower should consider the following impacts:
1. Credit score requirements have been relaxed: This will lead to greater inclusion and give an impetus to the economy, providing relief to the many borrowers whose loan applications would otherwise get rejected. The reason for a dip in credit score can be quite trivial sometimes – such as a forgotten credit card bill that kept on piling up against a minimal outstanding balance in one’s account.
2. Personal and pension loans under an emergency COVID-19 facility have also been launched: Government guidelines have been given to banks to meet the individual needs of retail customers, who can use these loan products. Retail borrowers can avail of a loan of up to Rs 2 lakh, with all charges and concessional interests waived.
3. Increased digitisation: Keeping social distancing and speed of service in mind, renewed efforts are being made to widen the retail banking outreach. This is also evident in retail loans. A case in point is the ‘PSB 59 minutes’ portal for retail loans. With access to more than 25 public and private banks and NBFCs, loan processing turnaround is seeing a new benchmark. Increased digitisation will ensure hassle-free and transparent lending for borrowers.
4. Lower returns on deposits: With the lowest repo rate cut since 2000, the yield on deposits has also taken a tumble. However, at an institutional level, banks will no longer be keen to keep deposits with the RBI. As lending will seem a more prudent option to them, increased loan drives will help the economy with more money pumped into the market.
5. Retail loans are indeed cheaper: Nationalised banks like PNB have slashed their repo-linked lending rate (RLLR) to 6.65%, so a borrower with a CIBIL score of 750+ can get a housing loan at just 6.80%. The impact of this reduction in the interest rates is that now the borrower would be eligible for a higher quantum of loan. EMIs would be lower and the overall loan will be less costly.
- Personal loan: Most public and private banks are offering personal loans at interest rates below 11%. These loans start from a few thousand rupees (Rs 50,000 being a popular starting point) and can go up to Rs 30 lakh. There is a fall of around 2% compared to the end of the previous calendar year.
- Home loan: A home loan can be availed of at a rate of 7% to 9% with most banks and NBFCs. SBI home loans are available with a 0.2% processing fee while most others charge 1% or less. Notably, home loan interest rates fell below 8% for the first time in over 15 years.
- Auto loan: Most leading public and private banks are offering auto loans in the range of 7-9%. Prominent features include fixed interest rates and flexible tenure of up to 7 years.
As the COVID-19 pandemic shows no sign of ebbing, banks are trying hard to draw in reluctant borrowers to get the economy running again. If asset buying is on your mind, this is the right time to take advantage of the market situation, especially as lending institutions are willing to do far more hand-holding than usual. However, remember that future income flow and purpose of loan are relevant even during the pandemic. Be sure to consider other impacts of the lockdown – such as pay cuts, job losses, lower yield on investments, etc. – before jumping in.