Banks try to attract home buyers with low interest rates

Part of a focus on retail advances, as corporate demand remains subdued; could reverse if RBI raises repo next month

Barely days after the Reserve Bank of India (RBI) surprised the Street by keeping the repo rate unchanged, banks and mortgage lenders have started lowering the interest rates on home loans.

State Bank of India (SBI), ICICI Bank and Housing Development Finance Corporation (HDFC) have reduced their housing loan rates to persuade home buyers to borrow.

There is relief for banks in the current quarter on cost of funds. In the July-September quarter, they borrowed heavily from the Marginal Standing Facility window at 10.25 per cent, following the central bank's decision to make money dearer, to curb volatility in the foreign exchange market. With the currency stabilising, RBI has reduced the MSF rate to 8.75 per cent; liquidity has also become more comfortable, on the back of government spending, and banks' reliance on the MSF window has fallen sharply. This had a favourable impact on their cost of funds.

SBI, the largest commercial bank, has been the most aggressive reducing its housing loan rates, by 15-35 basis points. The state-run lender is now offering home loans up to Rs 75 lakh at 10.15 per cent, one of the lowest for housing finance. Female borrowers will get an additional discount of five bps.

The bank’s housing loan portfolio increased almost 20 per cent to Rs 130,034 crore in the 12 months ending September 30. SBI’s gross advances during this period grew 19.2 per cent during this period. The share of home loans in its total advances has remained at around 13.5 per cent for three years.

SBI Chairperson Arundhati Bhattacharya said the rate cut will help accelerate the bank’s home loan growth in the near term. “However, we cannot expect a very sharp rise in the growth rate,” she said, as most of the bank's housing finance customers belong to the mid-market segment and the average size of the loans are not so large.

ICICI, the largest private sector lender, has decided to offer housing loans at a 15 bps lower rate till the end of next month, people familiar with the development told Business Standard. The bank has introduced a special scheme that will offer housing loans up to Rs 75 lakh at 10.25 per cent interest and above Rs 75 lakh at 10.50 per cent. The scheme will be available for new borrowers till January 31, 2014. Earlier, it was offering home loans up to Rs 75 lakh at 10.40 per cent, and above Rs 75 lakh at 10.65 per cent.

The share of home loans in ICICI’s retail advances improved to 54.8 per cent at the end of September, from 53.2 per cent a year earlier. The bank’s retail loan book had grown 19.6 per cent year-on-year to Rs 115,100 crore at the end of the July-September quarter.

HDFC introduced a similar special winter bonanza for its new customers on December 20. India’s largest home finance company has decided to pare the interest rate by 25 bps for home loans availed before January 31, 2014. HDFC is now charging 10.25 per cent on home loans up to Rs 75 lakh.

According to bankers, lenders have now shifted focus on retail advances such as housing and car loans to accelerate credit growth, as corporate loan demand continues to remain tepid. The improving liquidity situation has also eased the pressure on cost of funds, allowing lenders to offer home loans at lower rates without any significant erosion in margins.

But analysts say some of these offers are only for a limited period, which reflects the uncertainty over the direction of interest rate movement. “If RBI raises the repo rate in January, some of the schemes will not be extended,” said a banking analyst with a local brokerage. The central bank's next monetary policy review is scheduled on January 28, 2014.

Meanwhile, a combination of high interest rates and expensive property prices have kept the demand for residential real estate low across most cities. “Residential demand was subdued across all cities except Pune,” Jones Lang LaSalle, a real estate consultancy firm, said in its December monthly note to clients.