How ‘hawks’ and ‘doves’ impact your EMI
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A dove is inclined towards easy monetary policy, while a hawk is not
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Tag: interest rates
Canara Bank retains MCLR rates
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Canara Bank has retained its marginal cost of funds based lending rate (MCLR) on loans/advances across all tenors with effect from March 7.
Accordingly, the tenor linked MCLRs of the bank is as under: Overnight MCLR – interest rate 6.70 per cent, one-month MCLR – interest rate 6.70 per cent, three-month MCLR – interest rate 6.95 per cent, six-month MCLR – interest rate 7.30 per cent and one-year MCLR – interest rate 7.35 per cent. Repo Linked Lending Rate (RLLR) continues to be at 6.90 per cent.
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SBI lowers home loan rates to 6.70%
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State Bank of India (SBI) has lowered the minimum interest rate at which it will offer home loans from 6.80 per cent to 6.70 per cent for a limited period up to March 31, 2021.
India’s largest bank, in a statement, said its home loan interest rates start at 6.70 per cent for loans up to ₹75 lakh and 6.75 per cent for loans in the range of ₹75 lakh to ₹5 crore.
The lender is continuing with 100 per cent waiver on processing fees.
The bank said, overall, it is offering concession of up to 70 basis points based on loan amount and credit score. This also includes concession of 5 basis points each for women borrowers and digital sourcing through the YONO app.
Saloni Narayan, Deputy Managing Director (Retail Business), SBI, said, the reduced interest rates are one of the best in home loans.
Last month, the bank said it expects to double its home loan portfolio in the next five years to ₹10 lakh crore on the back of higher economic growth and growing preference of the new generation to buy a home early.
India’s largest bank took about 10 years to grow its home loan portfolio from ₹89,000 crore in FY11 to touch the ₹5-lakh crore mark now, according to Chairman Dinesh Kumar Khara.
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Private banks close gap with public sector banks on term deposit rates
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While PSBs’ WALR on outstanding loans fell by 69 bps between February and November 2020, for private banks the rate fell 59 bps. Representative Image
As private banks gain share in the banking system’s deposit base, they have begun to close the gap with public sector banks (PSBs) in terms of how much they pay for deposits. According to Reserve Bank of India (RBI) data on bank group-wise interest rates, the difference between the weighted average domestic term deposit rates of the two sets of banks fell to three basis points (bps) in November 2020 from 32 bps in December 2019. The data also point to poor transmission of rate cuts, with the weighted average lending rate (WALR) on outstanding rupee loans declining only 69 bps between February 2020 and November 2020 even as the repo rate fell 115 bps over the same period.
Private lenders are now comfortable paying less on term deposits even as growth in this category of deposits has been slowing for them in FY21 so far. The central bank’s recent Trend and Progress Report attributed the moderation in term deposits to easing interest rates and the lure of returns on competing asset classes. “Term deposit growth of PVBs decelerated sharply even as it quadrupled in PSBs,” the report said.
Analysts attribute the downtrend in private banks’ deposit rates to a longer-term phenomenon of market share shifts. In a report dated December 16, analysts at Morgan Stanley said that one of the challenges for Indian private banks was that of funding, as they were gaining market share in loans faster than deposits.
Consequently, loan to deposit ratios were high, and private banks were paying a premium on term deposits relative to PSBs. “However, we note that large private banks have significantly accelerated pace of deposit market share gains over the past two years, and hence reduced the premium that they pay on term deposits,” the report said.
Another factor that has helped private banks lower term deposit rates is a faster accretion of low-cost deposits. Credit Suisse said in a recent report that deposit growth in Q2FY21 remained strong for private banks, with smaller private banks continuing to see strong growth post the outflows in Q4FY20, aided by higher rates being offered. “Given excess liquidity, banks have focused on growing their low-cost deposits and CASA (current account savings account) ratios have moved up for most banks,” the report said.
At the same time, private banks have also been slower to pass on rate cuts to their borrowers. While PSBs’ WALR on outstanding loans fell by 69 bps between February and November 2020, for private banks the rate fell 59 bps. Kotak Institutional Equities (KIE) on Monday pointed out that the gap between outstanding and fresh lending rates has been in the range of 110-140 bps for the past nine months. Before that, it had been increasing, led by a steady decline in fresh lending rates.
Obviously, loan spreads remain quite high and a closer look at specific product segments would prove transmission to be less effective than what the headline figure suggests. “In a relatively low growth and heightened risk environment, especially after Covid, we note that the spreads have continued to remain high,” KIE said, adding, “The spread over G-Sec with deposits and loan rates has widened implying banks are seeing lower spreads on investments and better spreads on loan yields.”
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DCB Health Plus FD: Beats most peers in returns
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Are you hunting for fixed deposit schemes that offer best returns? You can consider DCB Bank’s Health Plus Fixed Deposit (FD) as they offer relatively higher interest rates than most banks. This fixed deposit scheme also comes with free medical benefits.
Rate and tenure
DCB Health Plus FD offers one of the best returns at 6.9 per cent per annum on a 700-day (almost two years) fixed deposit. The interest rates in India are close to bottoming out and may remain at these levels till the economy recovers. At the same time, the rate cycle cannot persist at the current levels for a long period too given the elevated inflation and signs of green shoots in the economy. At this juncture, lock-in of investment for about two years is tenable. This also gives the investor an opportunity to reinvest at higher rates once the interest rates head up. DCB’s 6.9 per cent rate also looks attractive compared to rates offered on similar tenure bank FDs. While most public sector banks offer only 5-5.3 per cent interest rate for this bucket, private sector banks give up to 6.5 per cent for the same period.
Bank deposits are covered by the Deposit Insurance and Credit Guarantee Corporation of India (up to ₹5 lakh for both principal and interest). Thus, this deposit is a good option for those who don’t have much appetite for risk. Senior citizens will get an additional 0.5 per cent interest over and above the FD rates being offered by the bank.
Medical benefits
DCB’s Health-plus FD also offers free medical benefits such as teleconsultations and face-to-face appointments with empanelled general physicians and specialists, in addition to ambulance services. For this, DCB Bank has tied up with ICICI Lombard General Insurance Company. The only important condition here is that the minimum fixed deposit should be ₹10,000.
However, the benefits vary with the amount of fixed deposit. Say, for a fixed deposit of ₹25 lakh and above, 10 teleconsultations, 10 face-to-face appointments, pharmacy expenses of ₹3,000 comes for free along with unlimited ambulance services. While for a FD of less than ₹ 1 lakh, medical benefits include only four free teleconsultations.
To make use of the benefits, the customer should download the ‘IL Take Care’ mobile app. The medical benefits continue throughout the tenure of the deposit. In case of premature closure, the free health benefit will also cease to exist.
About DCB Bank
DCB Bank offers loans to diversified segments including micro-SMEs, SMEs, mid-corporate, micro finance institutions and NBFCs. .As on September 30, 2020, DCB’s gross and net NPA were at a reasonable 2.27 per cent and 0.83 per cent, respectively. The collection efficiencies, which were hit during the lockdown period – have been improving since June 2020. In September 2020, the collection efficiencies for the segments – loans agianst proporty, home loans and commercial vehicles stood at 88 per cent, 91 per cent and 77 per cent respectively. The bank is also adequately capitalised with total capital adequacy ratio at 18.28 per cent.
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For conservative investors and retirees, tax-free bonds are a good bet
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Over the past year or so, many banks have slashed interest rates on the fixed deposits (FDs) they offer, due to the successive repo rate cuts by the Reserve Bank of India (RBI). For instance, State Bank of India (SBI) now offers just 4.9 per cent for 1 year to less than 2 years tenure, and 5.4 per cent for tenures of 5 years up to 10 years.
Also, over the past few years, credit quality issues in debt instruments such as rating downgrades and default in repayments have given trouble to many fixed income investors. Such credit events led to a sharp erosion in the value of the investment products that held these distressed assets in their portfolio. So, capital safety has now become a prime concern for many retail investors.
Given the low interest rate regime, investors looking for debt instruments that provide returns relatively higher than bank FD returns, and also capital safety can consider tax-free bonds available in the secondary market.
Conservative investors and also retirees in the highest tax bracket looking for a regular income on a yearly basis can consider buying these bonds from the secondary market.
A total of 193 series of tax-free bonds issued by 14 infrastructure finance companies from FY12 to FY16 are listed on the bourses. They are traded in the cash segment on the BSE and the NSE. These tax-free bonds were issued by public sector undertakings and public financial institutions that are backed by the government of India. Hence, the investments made in these tax-free bonds enjoy capital safety.
Further, the bonds issued by most of these companies have the highest credit rating of AAA. Instruments rated AAA are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry the lowest credit risk.
Attractive yields
Data compiled by HDFC Securities show that there are a handful of tax-free bonds with good credit rating that trade with relatively higher volumes and also offer reasonable yield to maturity (YTM) in the secondary market (see table). These include the series of PFC, NABARD, HUDCO and NHAI bonds.
For instance, the NHAI NR series (ISIN INE906B07EJ8), with a coupon rate of 7.6 per cent and residual maturity of 10.3 years, trade with a YTM of 4.8 per cent on the NSE. Since the interest paid by tax-free bonds are exempt from income-tax, the current yield of 4.8 per cent translates to 6.9 per cent pre-tax yield for investors in the 30 per cent bracket. This rate is higher than those offered by most bank FDs currently.
Both the BSE and the NSE facilitate the purchase and sale of tax-free bonds. These are listed and traded in the cash segment along with equity shares. Retail investors can buy and sell tax-free bonds through demat accounts.
While investing in tax-free bonds through the secondary market, investors should not just look at the coupon rate and the market price of the bonds. There are three parameters that they should consider — credit rating, YTM and liquidity.
YTM is the internal rate of return earned by an investor who buys the bond today at the market price, assuming that the bond is held until maturity, and that all coupon and principal payments are made on schedule.
HDFC Securities data shows that around 15 series of tax-free bonds were traded with YTM ranging from 4.4 per cent to 4.9 per cent and good daily average trade volumes over the last one month (see table).
Keep in mind that selling tax-free bonds in the secondary market attracts capital gains tax. If you sell them within 12 months from the date of purchase, you will have to pay tax on the gains as per your tax slab. If you sell after 12 months, tax has to be paid at flat rate of 10 per cent; no indexation benefit is available.
Factors to consider
Take into account the credit rating, YTM and liquidity of the tax-free bonds trading in the secondary market
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