RBI monetary policy review: Lenders split on home loan rate cut

The Reserve Bank of India’s (RBI) signal that the repo rate is not going to increase any time soon has left home loan players divided on pricing, going ahead.

Housing Development Finance Corporation (HDFC), the largest housing finance company in the country, said that the extremely competitive home loan market may see some further reduction in pricing. On the other hand, State Bank of India, the country’s largest lender, ruled out any reduction in home loan rates.

Home loan rates are perhaps at their lowest at present, mainly due to excess liquidity in the system amid the central banks’ measures to boost the pandemic-hit economy, along with the repo rate, which is also at its lowest level.

Keki Mistry, vice-chairman and chief executive officer of HDFC, told Business Standard, “Some lenders, depending on their cost of funds, may at most cut home loan rates by 5 - 10 bps. But broadly, we are at the bottom of the interest rate cycle. Having said that, it is very unlikely that in the near term the rates will go up”. “The yields on government securities have come back to almost the pre-budget levels post the monetary policy today (Thursday). Personally, I do not see any spike in bond yields in the near future.”

“The yields on bonds (the 10-year benchmark) have come down by 22 bps after cancellation of auction earlier and (today’s) policy statement. But, the rates, both lending and deposits rates, are not expected to change now,” SBI Chairman Dinesh Khara told Business Standard.

Anil Gupta, vice president and group head, ICRA Ratings, said the system was close to the rate-hike cycle. Some lenders may onboard customers by cutting lending rates by 5-10 basis points not because of reduction in cost of funds but due to confidence that this situation will be short-lived. These floating rate loans will get repriced shortly as the policy rates rise.

Both banks and housing finance companies had become very aggressive in the home loan segment over the last few quarters, given the historically low rates. Among banks, both public and private sector ones were competing to get their share of the pie in this market.

Atanu Kumar Das, managing director and chief executive officer, Bank of India, said there was no more room for a further cut in lending rates as the margins were already wafer-thin. Bank of India is offering home loans at 6.5 per cent interest, lower than most peers.

Gagan Banga, the vice-chairman and managing director of  Indiabulls Housing Finance, said the rate cycle has turned.

“There is no scope for rates to go down further. In the usual course, home loan rates are 100-200 basis points higher than the yield on the government bonds. But now the home loans are low around 6.5 per cent, while yield on government 10-year bonds is ruling over 6.7 per cent, indicating a person is more credible than the government,” he said.

While credit growth in the system has been very tepid for the last two years, the retail segment, especially the home loans segment has driven the credit demand in the system. Even banks that were traditionally into corporate lending are looking to increase their home loan portfolio, given the inherent demand for such credit.

Credit growth of scheduled commercial banks accelerated to 9.2 per cent year-on-year (YoY) at the end of December 2021, after breaching the 7 per cent-mark in November for the first time since April 2020. However, loan growth contracted during the first fortnight of January 2022, resulting in the growth figure falling to 8 per cent.