Rising rates prompt extension by 10 more years; others may follow suit.
There is some good news for home loan borrowers, with the State Bank of India increasing loan tenures by 10 more years. Other banks are expected to follow suit.
Banks normally keep the equated monthly instalment on home loans intact and extend tenure to pass on the rate increase. SBI has allowed stretching the loan repayment tenure to a maximum of 30 years as interest rates have risen by 250-300 basis points in the past year and a half. Typically, a 25 basis points hike in interest rates increase the EMI for a 20-year loan by Rs 17 for every Rs 100,000 borrowed. The loan tenure on average extends by three to four months if rates rise by 25 basis points.
Typically, banks give home loans for a maximum period of 20 years and may extend the tenure for another five years on request. But with a dozen rate hikes in 18 months, the EMIs have shot up substantially. “We have extended tenures for retail borrowers to up to 30 years after the recent rate hikes,” said a senior SBI official. “We are allowing extension up to the age of 70 years and also take into account the individual’s pension income,” said the official.
The official said there had not been many defaults in the retail segment but the bank would like to exercise caution till interest rates stabilised. “Loan tenures can be revised as and when interest rates stabilise or even start easing, going ahead,” said the official.
SBI’s decision comes after the government asked public sector banks to expand tenures instead of hiking the instalment amount in order to pass on the rise in cost. Some other public sector banks are also likely to follow suit.
M Narendra, chairman and managing director of Indian Overseas Bank (IOB), said if the customer had a higher service period, the bank extended the EMI tenure. “We are looking if we can increase the tenure by 10 years, as it is permitted by the Reserve Bank of India” he said.
“We are looking at cash flows and depending on that we are extending the loan repayment period to provide some comfort to the customers,” said J P Dua, chairman and managing director of Allahabad Bank. The Kolkata-based bank, however, is increasing the tenure on a case-to-case basis after taking into account the customer's repayment capacity.
The Reserve Bank of India has hiked policy rates by 325 basis points since March 2010, following which most banks have hiked lending rates by up to 250 basis points making loans dearer for borrowers. The central bank, which meets next Tuesday to review its policy stance, is expected to raise rates by another 25 basis points.