Home loan package to be finalised next week

The package for extending home loans at affordable rates will be finalised early next week as the government is yet to decide on the issue of giving interest subsidy for loans below Rs 5 lakh.

Bankers met in Delhi yesterday to discuss the package. “There are many norms and details including fiscal support that need to be fine-tuned. The government is working on them and a detailed scheme will be ready early next week,” a senior Indian Banks’ Association official said.

A public sector bank chairman said, “If the government wants us to give home loans at rates below 8.5 per cent, then some form of interest support (subsidy) is necessary. The comfort level for banks is 8.5 per cent for home loans up to Rs 5 lakh and 9.25 per cent for the Rs 5 lakh-20 lakh bracket.”

The public sector banks have indicated that they will cut the interest rates by 50 to 100 basis points for home loans up to Rs 20 lakh.

“The government is already extending 3 per cent subsidy for the short-term agriculture loans, while a similar support is being provided for export credit,” pointed out a senior executive with a Mumbai-based bank.

A senior Bank of Baroda official said, “While it is true that cost of funds for banks is coming down, there is a risk of rise in defaults given the economic downturn. Therefore, the interest rate for loans will have to factor in the high risk of defaults.”

To facilitate banks to lend at these rates, sources said, the RBI may relax risk weights for these categories of housing loans if the banks reduce the margin money from 25 per cent to 10 per cent. Currently, the risk weight is 50 per cent for home loans up to Rs 20 lakh.

A reduction in the margin requirement, or the part of the loan paid by the borrower upfront, will mean that banks will have to provide more funds to the extent of the increase in the actual loan amount. A relaxation in risk weights will reduce the cost of the loan for the banks.

Other incentives discussed at the meeting included a waiver of processing charges for home loans and a five-year lock-in period for interest rates.