• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Our Bureau

Mumbai , Aug. 27

THE Reserve Bank of India has suggested that banks should have a benchmark rate for home loans to ensure that their cost of funds is protected.

In its annual report, RBI has cautioned banks against an unbridled growth of housing finance and advised them to take due precaution in the matter of interest rates, margin, reset period and documentation.

"While the increase in disbursement of housing finance is heartening, cause for potential worry is that by lowering the lending rates, banks are approaching the cost of funds," according to the central bank. Banks set their lending rates lower on housing loans and at times below PLR, due to lower risk weight.

The interest rate on home loans is hovering in a range of 7.50 per cent to 9.75 per cent, which is higher than the interest rate on longer-term deposits of commercial banks by 1.5-3.75 percentage points.

In most cases, banks are not covering more than 85 per cent of the cost of property within an overall ceiling of Rs 50 lakh, with differential margins, separately on land and building of houses, the apex bank observed.

Interest rates on housing loans have registered a generalised decline, best exemplified by the drop in housing rates of State Bank of India, which came down from 11 per cent in April 2002, to 9.5 per cent in May 2003, and the 175 basis points decline in ICICI Bank's home loan rates during the same period, according to the RBI annual report.

Consequently, there has been a 55-per cent increase in credit flows to housing during the year 2002-03, aided by a surge in bank finance to this sector. Housing loans extended by banks stood at 6.1 per cent of non-food gross bank credit at the end of March 2003 as compared to 3.8 per cent at the end of March 2001 and 4.6 per cent at end-March 2002.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Risk aversion, stable returns guide forex kitty investments

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line