Nair had to hardly hunt for a loan.

He was swamped by banks with discounts on prevailing floating rate interest rates. But the tight monetary stance of the Reserve Bank of India over the last three years and the Government’s inability to keep prices stable have dealt Nair — and lakhs of borrowers like him — a double whammy. According to Finance Minister P Chidambaram, four-fifth or 80 per cent of the total number of six million borrowers have taken home loans of under Rs 20 lakh. While the annual income levels of such borrowers are not available, they presumably fall under the Rs 5-10 lakh annual income category given the size of their loans.

Nair, whose annual income is Rs 14 lakh a year, took a Rs 17 lakh home loan from HSBC at a floating rate of 8.35 per cent in February 2006 for a two-bedroom flat in Ghaziabad, where prices had already more than doubled in the previous three years. His equated monthly instalment worked out to Rs 17,000 for 15 years. He liquidated part of his stock options, sold his mother’s old house and together with the Rs 17 lakh loan bought the flat for Rs 23 lakh.

The last two years or so have not been particularly easy for the country’s central bank too. To keep inflation and inflationary expectations at bay, it raised the cash reserve ratio (the amount banks have to keep with the RBI) by 300 basis points to 8.25 per cent now between January 2006 and June 2008. It also had to raise the repo rate (the rate at which banks borrow from the RBI), that signals bank to increase lending rates, to 8 per cent now.

... contd.