NRI loan interest rate - Purpose is the king

Published: 07th July 2008
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Summary: NRI loan interest rate depends heavily on the purpose of borrowing. When the purpose is to invest in share or commercial immovable property market, the payable interest rate is higher. Any loan borrowed by the NRI to be invested at an employment generating project is charged a lower rate.

The Reserve Bank of India has recently banned public and private sector banks from lending more than Rs 20 Lakh against the deposits of NRIs. This ban is imposed by the apex bank on suspicion that a large part of such loans is being diverted for speculation in shares and immovable property market. These cautious steps from the apex banking body are aimed at ensuring that bank credit is streamlined towards productive sectors other than the retail sector. It will definitely squeeze the extra investment flow particularly in commercial real estate and capital markets. The hike in standard assets provisioning(SAP) will lead to an increase in retail lending rates.

Loans for Non resident Indians is growing at an average rate of more than 30% in the last three years. this phenomenon is unusual even in an economy that is growing at over 8% during that period and expected to expand 8.5%-9% in 2008.The retail credit had grown 34% year-on-year and non-food credit, which includes the retail portion, grew by 31% during this period.

The NRI loan interest rate depends upon a number of factors. The first factor affecting the payable rate of interest is the purpose of borrowing. The loans for NRI come at a lower rate of interest when the purpose of borrowing is to generate employment. If the person is going to set up a heavy industry that will provide employment, the interest rate on the loan plan remains lower. There is also difference in interest rate according to the the nature of the product going to be produced after the investment. If the the nature of production is export oriented, there will be a slash in the payable rate of interest. But, when the person is lending to invest in Business process out sourcing or software technology park, the payable interest rate is higher.

When the person borrows loans for NRI to invest in the volatile markets like stock and commercial real estate, the loan availability and payable rate of interest is affected. It is because of the fact that these markets are not only risky but also the outflow of return is more. More amount of rupee is drained from the country, if the NRI invests in the stock market and earns profit. In case of real estate investment, if the purpose is residential property buying, the NRI loan interest rate is lower. According to the guidelines of the RBI, the NRIs can avail home loans at a lower rate of interest.

All the major public and private sector banks have put NRI loan interest rate at competitive level after the liberalistion of Indian economy. In 1992, the license and quota raj was over and the NRIs were permitted to invest In Indian economy with greater ramification. Except the key areas of national security, now NRIs are free to invest in all most all projects that can generate employment and income. The foreign direct investment level has also been increased and in some sectors as high as 72% FDI is also allowed.

As India is growing as a global profitable investment destination, the Indian banks need to more diversify and specialise their NRI loan products. Apart from NRI loan interest rate, other important aspects needing the modification are processing, documentation, availability clause and loan amount. These people are coming with a profit and investment motive. Hence, they should be offered the loan amount as quick as possible. The documentation process should not be cut short at a stretch but there should be minimisationS. The Upper limit of loan amount should be increased and there should be a floating interest rate in case of loans for NRI.

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