extra Flashcards
why loans and emi getting expensive
Indian Banks are going through challenging times:
They are finding it hard to convince people to deposit their money in banks in return for interest.
Instead, people are diverting their money to alternative investment like mutual fund, Equity, Real estate, and commodities like Gold, silver etc.
Makes sense too.
Indian bank offer average interest on deposit between 6 to 7%
Whereas interest offer by equity and mutual funds are way higher.
Take the benchmark indices for example, Sensex has gained more than 22% and Nifty has gained more than 25% in past year.
Fair enough? How does it impact your Loan and EMIs
You see , if deposit in bank drop, bank would become more selective at doling out loan.
Banks ability to lend depends on Credit-Deposit ratio.
CD Ratio = Total Advance/Total deposit *100
It is a ratio of how much a bank lends out of deposit it has mobilized.
Basically, it indicate how much each rupee of deposit goes toward credit.
So an ideal CD Ratio is anywhere between 65% to 75%
Anything lower than that indicate bank is under utilizing its resource and anything above indicate liquidity and credit risk for bank.
And its seems like the Indian banking system has plagued by the latter.
As per the RBI, the CD ratio is around 80% the highest in the past 20 years.
The RBI advising bank to reign in its CD ratio.
To achieve this, banks will slow down lending and become more selective in granting loans.
This would in turn make loans more expensive bank could increase interest rate on loans to damped the demand.
