Going to take a home loan from PSU bank? Get one for car free

According to the article “Going to take a home loan from PSU bank? Get one for car free” published on 4^th October 2012 (http://articles.economictimes.indiatimes.com/2012-10-04/personal-finance/34260245_1_retail-loans-conversion-fee-new-customers) the article states that public sector banks is facing financial trouble and in attempt to boost their revenue has issued a “promotion” like offer to people seeking loans. Their scheme was to offer combo retail loans along with other loans, such as house loans and car loans. Also, they reduce or completely remove other sur charges such as processing fees, to reduce the overall cost of taking up a loan.

“'No processing charges on home loan if availed with car loan' - screams a banner outside a UCO bank branch. The Kolkata-based lender is rolling out standalone offers too: '50 per cent off on processing charge on home loans', '100 per cent off on processing charges on car loans'”

“We have noticed that a segment of customers prefers to take home and car loans together. We have lined up the combo scheme for them," said UCO Bank CMD Arun Kaul. "The design of the scheme (is such that it) will not put additional stress on customers or the bank's asset quality”

The lines above are taken from the article stating the plan of action public sector banks are taking to boost demands for loans.

The actions of the public sector banks may bring about several changes to the market. One possible outcome maybe, because the processing fees of loans have been reduced it has become relatively easier for more and more people to take up loans. Resulting in higher demand for taking up bank loans. However, this does not just effect bank loans alone, an increase in approved housing loans would result in higher demand for houses.

With this the demand curve for the housing industry market would shift to the right, increasing both price and quantity from demand curve 1 to demand curve 2 as shown in the graph above. This decrease in retail loan prices will hold benefit and cost to producers and consumers. Real state agents would benefit from this as they will receive more business as more people are able and willing to purchase retail or housing. Consumers too would benefit to some degree, they would initially benefit in terms of obtaining loans at cheaper prices to purchase houses but will later on suffer when the prices of housing becomes higher and higher due to the housing demand increase. The government can play a part in this selling off government bounded properties at cheaper prices to help accommodate the increase demand.  Producers of houses however, would benefit as the demand for houses increases they too would increase their supply of houses and build more and more houses to meet the demand of consumers. When this happens contractors would require more raw materials such as, timber, metal, and cement, to continue supplying houses. This in turn generates a higher demand for the market of raw materials, thus shifting the demand curve to the right and increasing both price and quantity. As a result, the cost for building increases gradually, the government can assist by offering subsidies to suppliers of these raw materials, effectively reducing the overall cost to produce a housing unit. This will in turn help reduce the increasing prices of houses. Nevertheless, contractors also require labour to construct their houses. As a result, demand for labour increases, when this happens producers (contractors) are willing to pay more for labour and quantity of labour demanded increases. This is beneficial for workers as they will be given higher wages and salary, and also plenty of working opportunity and choices.

Moreover, public sector banks also offers reduced processing charges for car loans alongside housing loans in their scheme to improve demand. Similarly to the effect of the increase in approved housing loans.

 Approved car loans would result in higher demand for cars. Thus the demand curve for the car market would shift to the right, resulting in higher prices and quantity as shown by the graph above at point demand curve 1 to demand curve 2 . This benefits most producers as more and more people have the ability and willingness to purchase more cars. However, cars come in various choices, Luxurious cars, and budget cars. Producers of luxurious cars would benefit more than producers of budget cars. This is because as luxurious cars are more expensive they are harder to sell and have lower demand as to compared to budget cars during a normal period. But when car loan prices are cheaper people become more able to purchase luxurious cars rather than settling for budget cars. This is because budget cars are seen as inferior and when people are able to purchase normal or luxurious goods they tend to forgo inferior goods. To counter this, the government can implement higher taxation to luxurious cars, this will result in the inferior cars as a better alternative in terms of price to value. As a result, producers of luxurious cars would see a higher increase in demand rather than producers of budget cars. Consumers will also initially benefit from the decreased price of car loans, but will later on suffer from higher car prices. Nevertheless, complimentary goods for cars, such as, fuel, tires, and even maintanence fees would also be effected by this. As the principle of complimentary good states that if the demand for one good increases, the demand for the complimentary good will also increase. With this goods like petrol will experience and increase demand, shifting its demand curve to the right and increase both price and quantity. In my opinion, the government should give or increase existing subsidies to producers of this market to reduce the price they charge to the consumers. As a result, a decrease in the price for car loans would result in higher demand for cars which will increase demand for complimentary goods, increasing the prices for both cars and complimentary goods. Producers of complimentary goods will benefit from this as prices increase. Consumers however, will suffer from this in the long-run as they continuously have to maintain their cars with complimentary goods, such as petrol, tires, and repair cost.

In conclusion, the action taken by public sector banks to increase their demand by reducing or negating processing fees, as well as offering car loans alongside retail loans not only result in increase in housing sale, but also impact the car industry as well as the industry for complimentary goods of cars.