Student Loan

Home loan companies have started to lean heavily on some of their borrowers, asking them to prepay a part of their loans and raise their equated monthly installments (EMIs).

Interest rates on housing loans have risen by 400 to 500 basis points — one basis point is one-hundredth of a percentage point — over the past two years.

The lenders are now realizing that it is no longer enough to merely tweak the EMI.

Many like HDFC and ICICI Bank are now asking customers to start looking at a combination of pre-payments and EMI increases to bring down their loan liabilities to manageable levels — a move that has started giving borrowers more pain than they had bargained for when they took the loans.

Others like the SBI are also in the process of sending out similar missives. Come July, the country’s largest bank will ask some of its home loan borrowers to pay higher EMIs. The SBI fears that such a directive could lead to some payment defaults.

A borrower, whose EMI went up last November after a rate rise, was spooked when he got another letter this week that said: “Your interest rate for your loan is 11.50 per cent effective June 1, 2007. Due to this change in the interest rate, the repayment tenure on your loan has stretched beyond the normal term of a loan. We request your immediate attention in this regard.

“One of the following actions from your side is recommended: alter the EMI suitably, consider a part prepayment of the principal, combination of Options 1 and 2, depending on your convenience.”

“This has come as a bolt from the blue,” said the borrower who wished to remain anonymous. “I looked over the rate hikes and found that my floating rate had risen five times in the past year with three of them coming in the past three months. I will have to pay them about Rs 1.5 lakh and hope that the interest rates don’t rise any further.”

There is no guarantee that rates won’t rise any further. The RBI has kept its cards close to its chest and will be looking closely at global cues.

Last week, the US Federal Reserve didn’t raise rates but said it would be watching inflation very closely. Central bankers often raise benchmark interest rates to collar inflation but there’s a danger that this could trammel economic growth.

Senior bankers do not expect Indian interest rates to rise further. With the inflation rate slowing to a 13-month low, many expect the RBI to refrain from tampering with key interest rates when it unveils the monetary policy review in July.