What is the effect of demonetization

on bank loan interest rates?

With demonisation, more people are depositing money into the
banks. This means the banks have more liquid funds and more
money to lend. Many banks have also slashed their deposit rates
including SBI, ICICI Bank, HDFC Bank.
 Canara Bank, ICICI Bank and HDFC Bank have cut their
fixed deposit rates by up to 1%. State Bank of India cut
their fixed deposit interest rates by 0.15% on select
maturities.
 HDFC Bank and ICICI Bank have cut their deposit by up
to 0.25%.
 United Bank of India has slashed their rates by 1% only
on the short-term deposits.
In the banking world, when deposit rates are cut, it generally
means the lending rates will also be slashed down. Since banks
are paying lower deposit rates to customers, this allows them
room to charge lesser on loans. Once interest rates come down,
this would translate into a lower EMI. The timeframe for loan
rates to come down could take anywhere between 3 months and 6
months. In the past, the Reserve Bank of India noticed that when
it hiked up the repo rate, banks were quick to change theirs, too.
But when the RBI cut the repo rate, banks took excruciatingly
long to cut their rates as well. The RBI then introduced a new
regime of the MCLR (Marginal Cost of Lending Rate). Under this
system, banks are required to change their interest rates
periodically. So under the new MCLR system, we can expect
interest rates to change quicker.
If your loan is under the MCLR scheme, then you might stand to
benefit from the demonisation if your bank slashes its lending
rates. MCLRs are set for 1 year with subsequent reset dates
through the loan tenure. So once your loan reaches its MCLR reset
date, you could benefit from lower rates of interest. This will bring
down your monthly installment and free up cash in hand.
If your loan is under a fixed rate of interest, it will not be affected
by the demonisation. Once you have opted for a fixed rate of
interest, it will remain unchanged for the entire tenure, regardless
of market trends.

Demonetisation: Interest rates in grey market for

loans drop to 5% from 30%
MUMBAI:Interest rates have dropped to 5% from as high as 30% in the
grey market, where a so far flourishing under-the-counter lending business
has been stifled by the drive against black money through demonetisation.
Those who use real estate to park cash are hit as well, with no takers for
the assets even at big discounts as the threat of benami properties coming
under tax scrutiny looms large.

Under grey market lending schemes, investors pool in money that is lent to
real estate developers, small companies and people in distress at high
interest rates. Most of such loans are given in cash and there are no written
agreements. They can’t now lend or accept repayments in the demonetised
Rs 500 an ..
“The interest rates charged were anywhere from 18% to 30% per annum
depending on the size and tenure of the loan,” said an investor who is part
such an arrangement. “Those who were to return money borrowed earlier
are offering that in high denomination currency notes, and we ourselves are
stuck with these. Due to this the interest rates have come down to
minimum, about 5% per annum or even less in some cases,” the investor
said. Many of these investors are set to see big losses, said experts.
Since these money lending circles do not have any legal protection, they
only lend to people they know well or in many cases only within a
community. “Some of the business communities have such money pool for
lending. They lend only to businessmen and developers within the
community,” said a Mumbai-based investor in such schemes.

“In most cases, the money lent is collected at one place, which is tough
now given the situation as there are fears that there could be tax raids.
Most of the grey market or informal money lending businesses are in big
trouble,” a tax consultant said.

Cash transactions have not just fallen in the lending circles but the impact
is also trickling down to some of the other investments, like real estate.
Investors who buy and sell property while dealing in cash are stuck with the
real estate. Many of them are willing to give a discount of as much as 25%
on the property price in just about a week after demonetisation. The hope is
that even if they get 70% of the price in cheque, it would still be better than
coming under income tax scrutiny, as the government recently threatened
to go after benami properties. Experts said in most of the cases, the
investors who put in money in real estate and cases, the investors who put
in money in real estate and cash loans are the same set.