Home Loan Rates Likely To Fall Below 11%

The 11 per cent benchmark rate on home loans is set to fall as leading banks are reviewing their housing finance rates.

The next round of rate cut, which is expected in the coming weeks, will see rates fall by 25 basis points, industry sources said. Faced with tardy credit offtake, fund-flushed banks are planning to push the home loan product by undercutting competition.

Tata Home Finance today dropped its rate of interest on home loans by 50 basis points to 11 per cent in its efforts to rationalise its rates with that of the market. Like LIC Housing Finance, it has decided to meet the competition and offer a floating rate product, which will be on monthly rest.

"Tata Home is not triggering a rate war. It is in fact responding to competition. We may see big players cutting rates to below 11 per cent by the end of this month," said the source.

The State Bank of India, whose home lending rates were linked to the medium-term lending rate (MTLR), was forced to bring down the interest rates on home loans in the face of market competition. Its rates today stand at 50 basis points below the MTLR. Sources said that the bank could take it down to 75 basis points below the MTLR.

ICICI Bank, another key player in the housing finance sector, is also planning to build up volumes. "This fiscal will be a year of cross-selling of our retail offerings in order to increase our cross-sell ratio as we capitalise on our customer base," said the bank's executive director Chanda Kochhar.

The recent 150 basis point reduction in the refinance rate by the National Housing Bank will help to bring down the cost of funds for housing finance companies.

Many of them had already factored this when housing finance companies like LIC Housing Finance Ltd and Dewan Housing reduced their rates to meet competition.

For the banks, the maximum push has been on the housing loan front, where there is no depletion of assets and the rate of default is minimal. The industry average in terms of non-performing assets is less than two per cent. In the first two months of the fiscal, ICICI Bank booked retail loans to the tune of Rs 2,000 crore, of which 50 per cent has been accounted for by home loans, said senior officials.

ICICI Bank managing director and chief executive officer K V Kamath had earlier admitted that "there is room for reduction" in interest rates. The Reserve Bank of India reduced the risk weightage banks can assign on home loan products from 100 per cent to 50 per cent in its credit policy and that has given the banks an advantage over housing finance companies for which the risk weightage is pegged at 75 per cent.

The rates of the Housing Development Finance Corporation Ltd (HDFC) are in absolute terms the lowest of the three major players in the industry. However, it continues to offer annual rest unlike ICICI Bank and SBI, thereby its equated monthly installments work out higher.