HDFC cuts lending rate by 50 bps for small customers

Housing Development Finance Corporation (HDFC), the country’s largest mortgage player, today announced a 50 basis point reduction in its retail prime lending rate (PLR) to 14 per cent, which would benefit its existing customers.

For new customers, who borrow up to Rs 30 lakh, the effective rate would work out to 9.5 per cent, while for those borrowing over Rs 30 lakh, the effective rate would be 10.5 per cent.

With the announcement of a reduction in the benchmark rate from March 25 all existing borrowers would be able to see a reduction in their interest cost over the next three months.

The move is expected to help check a possible shift of borrowers from HDFC to public sector banks such as State Bank of India (SBI) which have frozen home loan rates during the first year at 8 per cent. Executives at the housing finance company said that the cost of a 20-year loan from HDFC worked out to 9.5 per cent, as against 9.75 per cent for SBI.

However, HDFC Vice-Chairman and Managing Director Keki Mistry said the company had not seen a significant number of borrowers shifting to other lending institutions and added that there was a spurt in the number of enquiries for fresh loans.

“The cost of funds is coming down steadily. In addition, we have reduced the deposit rates twice in March and the cost of wholesale loans is around 8 per cent. So, it’s a move based on lower cost of funds and not because of any other reason,” said Mistry.

This is the second time in three months that HDFC has lowered its benchmark rate, with the cumulative reduction at 100 basis points.

Most banks, including SBI and ICICI Bank have lowered interest rate for new borrowers, while existing borrowers, in most cases, have not significantly benefitted from a lower rate regime.

Following the Reserve Bank of India’s decision to reduce the repo and the reverse repo rate by 50 basis points earlier this month, HDFC had indicated that it would lower rates by the end of March.

“We have been able to bring down our costs due to improved operational efficiency and good quality portfolio... In the current environment, there is a time gap between the reduction in the marginal cost of funds and the portfolio cost. Marginal cost of borrowing had come down earlier this year and the same was passed on to our new customers through our special limited period offer (rates beginning at 9.5 per cent), we are now seeing a reduction in the costs on a portfolio level and as in the past HDFC has ensured that the reduction in cost is passed on to existing customers by way of a reduction in retail PLR,” said HDFC Joint Managing Director Renu Sud Karnad.

The lending rate on existing loans to non-resident Indians has also been reduced.

HDFC had reduced deposit rates across maturities in the first week of March. During the first nine months of the year, on an incremental basis, retail deposits accounted for 55 per cent of the company’s funding requirement.

Between April and December 2008, HDFC saw a 15 per cent increase in loan approvals, which amounted to Rs 33,820 crore, while disbursements went up 22 per cent to Rs 27,211 crore. SBI’s home loan book grew 21.56 per cent to Rs 52,062 crore.