The Hindu Business Line : Floating rate home loans

HOW floating is floating rate loan, the most popular product on the home loan turf, with over 90 per cent of the market having availed itself of it in the last few years? Better still, how many people understand it.

Though interest rates have fallen for close to three years now by 2-4 percentage points, the benefit has been passed only to select customer segments, such as new home loan customers and AAA corporates, leaving all others by the wayside. Bankers seem to truly live up to the line, `A banker will always give you funds so long as you don't need it!'

Given below are some figures on how floating rate home loans, which are typically linked to the prime lending rate (PLR) of a bank/HFC (housing finance companies), have moved over the past few years, and indicate how often the existing customer is given a raw deal.

Remember, the existing customer benefits only to the extent of the cut in the PLR of the institution and this is passed on through a reduction in the repayment period and not in the EMI (equated monthly instalments).

If a customer wants to get the prevailing rate even if the PLR is not slashed by the institution, just pay extra, says the bank/HFC. The charge levied varies from 0.5-1 per cent of the balance principal amount.

Take the case of one of the largest players in the industry, State Bank of India. The bank's floating rate (home loan) moves in tandem with the State Bank of India medium-term PLR or SBMPLR. While the SBMPLR has been slashed by only 1 percentage point over the last 3 years, the home loan rates to new customers have fallen by as much as 4 percentage points (see tables).

This creates a fissure between the new customer, who gets his 20-year floating loan at 8.50 per cent, while the customer who took his loan in May 2000 at 12.50 per cent will still be paying as much as 11.50 per cent as interest, with a reduction of a mere 1 percentage point effected through the change in the SBMPLR.

A floating rate does not mean a free float, said an SBI official defensively. "We reduce rates for the existing customer only when we reduce our medium-term PLR."

The problem is rather complex for banks since the PLR applies as a benchmark not only for housing but across all lending that is of similar tenor, such as term loans and car loans. So a slash in the PLR would translate into a slash across the board for all these segments of loans, which may not be desirable for the bank since competition is hot only in housing. It is similar in the case of the largest player in the market, HDFC. Though over the years most of the cuts in PLR and new rates have been matched, the most recent snip of 1.5 percentage points earlier this month was exclusively for new customers since the PLR was left untouched.

This means that a customer who took a floating rate loan from HDFC in 1999 at 13.5 per cent would now be paying interest at 9.75 per cent, 1.5 percentage points higher than the going rate, 8.25 per cent across tenors.

HDFC's explanation for this is that funds that have been lent to it by banks are still stuck at higher interest rates and they are not ready for renegotiating those rates. Therefore, we are not able to fully pass on the fall in interest rates to our existing customers, said Mr Suresh Menon, General Manager (Mumbai Region), HDFC.

But look at the financials of the corporation as presented in its annual report: The spread on loans over the cost of borrowings for the year 2002-03 has only increased to 2.15 per cent per annum up from 1.96 per cent in the previous year.

Take the case of another large player, ICICI Bank, which claims it has a separate PLR exclusively for housing, but still fails to bring parity between the existing and the new customer. The customer who took his loan in 2001 would still pay an interest of 8.75 per cent, 1 percentage point higher than the new customer who gets it at the latest rate of 7.75 per cent.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Delhi, Mumbai airports — GoM may call new tender for consultant

Floating rate home loans — Advantage new customers

For capacity addition, capital goods import — More mid-size cos tap bank funds

US economy to benefit from offshoring: McKinsey report

Unilever chief sets store by direct marketing