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Home loan rate cut on cards

BS Banking Bureau in Mumbai

The rates cut announced by the Reserve Bank of India is set to lead to fresh round of rate cuts in the housing finance sector. The State Bank of India now offers the cheapest home loan at 9.5 per cent. Sources said it may bring it down to 9-9.25 per cent and other banks may also lower their home loan rates over the next few weeks.

The State Bank announced a 25 basis points deposit rate cut on Tuesday but refrained from cutting its prime lending rate for the time being. Housing finance major Housing Development Finance Corporation is also reducing its deposit rates by 25 per cent from November 1.

"It is only natural that the home loan rates will go down further as all banks are targeting this segment for business growth and there is fierce competition," said an industry source. Bankers are comfortable in home loan disbursements as bulk of these loans are floating rate loans and hence they do not create any asset-liability mismatches.

The Reserve Bank of India has been emphasising on floating rate instruments on both assets as well as liabilities sides to avoid any kind of asset-liability mismatches. The central bank discussed this issue with the bank CEOs at its credit policy meeting.

"The RBI wants us to push for floating rate deposits where the interest rates can be resent annually or six-monthly. However, till now the depositors have been resisting this. Once we are able to make the floating rate deposits popular, we will be able to generate more resources for home loans. The rates for home loans will go down further," said a public sector bank chairman.

If the 50 basis points cut in the bank rate is passed on, the equated monthly instalment on a Rs 10 lakh (Rs 1 million loan for a 15 year period would come down by almost 25 per cent from what it was four years ago.

In August 1998, when the interest rate in housing finance rate was 15.25 per cent, the EMI on a Rs 10 lakh loan for 15 years worked out to Rs 14,424 on an annual basis.

Today, at 10.5 per cent interest rate, the same loan costs Rs 11270 on an annual basis and Rs 11,053 on a monthly basis which will further reduce to Rs 10,850 if the interst rates are dropped by even 25 basis points.

LIC Housing Finance director and chief executive Kranti Sinha said that it was not looking at any rate cut at the moment. He, however, added that it would remain as competitive as any other bank or HDFC in the housing finance category.

Another HDFC officials added that in case the commercial banks decide to cut their prime lending rate and then pass on the benefit to the housing loans as well, the housing finance companies will have to cut rates in order to remain competitive.

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