The Hindu Business Line : Are home loan rates heading further south?

With too much money chasing too few borrowers, banks are driving up retail volumes, especially in the housing sector, resulting in an aggressive reduction of interest rates.

Mumbai , Oct. 12

ARE interest rates on housing loans likely to go down any further? The answer might well be `yes', according to bankers.

A section of bankers believe, that if the Reserve Bank of India cuts the bank rate in the impending Monetary and Credit Policy, the most aggressive players in the housing finance business will in all likelihood lower their lending rates further.

"At what rate a bank lends, depends on how they work out their cost of funds. If there is a change in the bank rate, it will be followed by a subsequent reduction in deposit rates and that in turn would have an impact on lending rates,'' according to Mr Rajiv Sabarwal, COO, ICICI Home Finance.

Mr Sabarwal admitted, that while competition had been increasing from the public sector and foreign banks, it was resulting in better products and more options for the customers. "We are aware of the surge in competition and are competitive on our interest rates,'' he said.

According to analysts, since signs of a pick-up in corporate credit are not very encouraging, this has added further impetus for the retail boom to gain momentum, propelled by the recent upswing in the domestic financial markets.

Most banks are already heavily invested in the Government securities market, over and above the RBI stipulated minimum of 25 per cent. State Bank of India is understood to have the highest SLR ratio of 55 per cent with other banks in hot pursuit at anywhere between 30-45 per cent.

In this scenario of too much money chasing too few borrowers, banks are driving up retail volumes, especially in the housing sector, resulting in an aggressive reduction of interest rates.

Analysts are of the view that the rally in the bond markets in the wake of lower interest rates and falling yields, will enable banks to book substantial profits which can be deployed to meet credit demand, without having to grow their balance sheets.

Added to this, with the average cost of deposits of most public sector banks being around the six per cent levels, which is higher than the current yield rates on gilts, it is more prudent for them to deploy surplus funds in the housing sector where they can earn better returns.

For example, the yield on a 5-year government paper is around 4.66 per cent, on a 15-year paper around 5.42 per cent and on a 20-year paper at 5.70 per cent.

On the other hand, banks such as State Bank of India can earn 8 per cent on a five-year housing loan, 8.50 per cent on a 15-year loan and 8.75 per cent on a 20-year loan.

In the recent past, foreign and private sector banks have been registering a substantial increase in their housing portfolios, by offering extremely `competitive rates', which is being viewed by public sector banks as undercutting the market.

State Bank of India, which has stoically braved the competitive onslaught and refused to participate in the `rate wars', was forced to yield to market forces when there was a slowdown in growth of its housing portfolio, and realigned its housing and auto loan rates by bringing it down by 25-150 basis points recently.

When asked about the possibility of interest rates on housing going down further, Mr A.K. Purwar, Chairman, State Bank of India, told Business Line, "Personally I am an advocate of stability in the interest rates. Interest rates have gone down enough and I think we need some respite now. SBI does not believe in rate wars and recently lowered its rates on housing only to align them with the market. Our targets remain the same and there is no upward revision there on account of a cut in interest rates.''

Meanwhile, bankers confide that there has been a slowdown in the growth of housing loans in the second quarter for almost all the players. One banker said, "The second quarter is considered to be the slack season in the housing finance business, on account of monsoon, etc.''

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Are home loan rates heading further south?