PSU banks to up new home loan rates

Public sector banks will increase interest rates on fresh home loans by at least 50 basis points to partly offset the rising cost of funds, but rates on loans already disbursed will remain unchanged.

This marks a reversal of their statement the week before last that they would hold home loan rates following a request from Finance Minister P Chidambaram.

Public sector banks abstained from increasing lending rates even as private banks like ICICI and HDFC raised rates by 50-100 basis points after the Reserve Bank of India raised its short-term (or repo) rate by 25 basis points in its credit policy last month.

A public sector bank chairman said, "Existing home loan borrowers are executing a certain level of equated monthly instalments (EMIs). For new borrowers, there is enough scope to raise rates as we are currently lending at 100-150 basis points below the prime lending rate (PLR)." (One basis point is one-hundredth of one per cent.)

The PLR of public sector banks stands at 11.5-12 per cent. Their floating home loan rates range from 9.5 to 10 per cent.

Public sector banks are also looking to tighten their credit appraisal practices for fresh home loans.

"While we are not going to slow down lending, we are checking the credit quality more stringently and are following some prudence to check speculative investment," said a public sector bank chairman.

The banks are also conducting valuation checks on borrowing proposals for second or third residential property purchases.

"Valuation of a property is important for second and third home buyers. No correction has taken place in property prices yet," said an official with another bank.

Public sector banks' housing loan portfolio grew 111 per cent to Rs 1,13,230 crore on September 2006 from Rs 53,737 crore in March 2004.