Govt banks lower home loan rates

Private banks say they’ll wait and watch.

After a week of discussions, government-owned banks today lowered interest rates on new home loans up to Rs 20 lakh.

The rate cuts, part of a government-driven initiative to provide a fillip to the struggling real estate sector, caps the interest rate on new home loans up to Rs 5 lakh at 8.5 per cent, and on loans between Rs 5 lakh and Rs 20 lakh at 9.25 per cent.

The new rates, which apply only to new borrowers, will help reduce equated monthly installments (EMIs) by Rs 185 to Rs 233 per lakh for loans of 20-year tenures.

BUILDING ON RATE CUTS
EMI (Rs per lakh) Old * New Savings
Up to Rs 5 lakh 1,101.09 867.82 233.37
Rs 5 to 20 lakh 1,101.09 915.87 185.22
* Calculations based on 12% fixed rate from State Bank of India

Banks also said they are reducing the interest rate on loans to micro enterprises 50 basis points and small and medium enterprises 100 basis points. To help these units tide over the liquidity crunch, extra credit in the form of a 20 per cent additional working capital limits will also be provided.

Private sector banks and large housing finance companies like HDFC are, however, yet to take a call on how they will respond.

Keki Mistry, managing director of HDFC, the largest player in the home loan segment, said Indian consumers do not transfer their home loans so frequently. “The interest rate for the new loans has virtually been at the same level for the last couple of months, but we have not seen any such trend,” he added.

On the possibility of a decline in the interest rate, Mistry said, “It is a function of availability of funds in the system and inflation. Since the inflation rate is coming down there is a possibility of an overall softening of interest rates.”

An Axis Bank source said the private sector lender will decide over the next two to four weeks.

"We are clearly seeing some softening of rates. Our cost of deposits, which was going up earlier, has plateaued now. Although it is difficult to predict how much we’ll cut, we may cut both lending and deposit rates across the board in the next two to four weeks," the bank executive said.

ICICI Bank said it is evaluating all options. The bank recently lowered the interest rate on new home loans up to Rs 20 lakh to 11.5 per cent.

For a home buyer who borrows from State Bank of India, which is at present offering a 20-year housing loan of up to Rs 30 lakh at 12 per cent, the saving on a loan of Rs 5 lakh will be around Rs 1,000 a month. For a loan of Rs 20 lakh, the borrower will pay more than Rs 3,500 less every month.

Elaborating on the special home loan package, SBI Chairman OP Bhatt said the scheme will be open till June 30, 2009. The loans will be offered at a fixed rate for five years after which the borrower can switch to the floating rate option without paying any charge.

Banks will also not charge any processing or pre-payment fee on home loans under the package and will bear the insurance cost on such loans.

However, existing borrowers from private sector banks will not be able to transfer their loans to public sector banks.

State-owned banks expect to disburse additional loans up to Rs 20,000 crore under the new package and by adding margin money that home owners have to pay, the amount sanctioned could touch the Rs 30,000 crore mark. SBI, a largest lender, expects to sanction loans worth Rs 6,000 crore under this package.

Over 80 per cent of home loans disbursed by public sector banks are below the Rs 20 lakh slab. According to Indian Banks' Association (IBA) data, the total housing loan portfolio of the 28 state-run banks stood at Rs 1,86,137 crore at end of September 2008.

Rates on home loans under the stimulus package could fall more if interest rates in general fall further, said IBA Chairman and head of Bank of India T S Narayanasami said.

Asked if this package was enough to boost demand, Narayanasami said banks have done their bit, and builders and real estate companies have to reduce housing prices to encourage people to buy new homes.

Besides reducing the lending rate for micro enterprises and SMEs, state-owned will set up cells to redress grievances regarding these loans, Bhatt said banks will give soft loans to these units and an ad-hoc credit of additional 20 per cent of their outstanding fund based limits to meet their working capital needs.

Currently, state-owned banks' loans to such sectors are growing at 25 to 28 per cent, Small Industries Development Bank of India's Chairman and Managing Director R M Malla said. Outstanding loans to micro, small, and medium enterprises are estimated at Rs 2,60,000 crore.