The Hindu Business Line : Will home loan rates continue southward journey?

On the belief that home loan rates have bottomed out, many customers are in the throes of deciding whether to drop anchor by opting for the higher fixed rate or wait and watch.

While some banks have started sounding warning bells that the customers should now be prepared for increasing interest rates, others are sure that there is scope for further cuts.

ICICI Bank, which recently nudged home loan rates to below 7.25 per cent, believes that there is scope for further cuts.

"We are trying to reduce our cost of capital. We feel that in the near future home loan interest rates can come down further," a senior ICICI Bank official told Business Line.

Hudco, which had kicked off the home loan interest rate war four years back but later lost the initiative to other companies, also believes that the interest rates can only go down in the long run.

"There is enough liquidity in the markets. Greater investments in the industrial sector may lead to pressure on the home loans market in the short run, but ultimately, India too will reach the global interest rate levels which are much below the rates prevailing in the country," said Dr P.S. Rana, Chairman and Managing Director.

Financial analysts said that they can explain why private sector banks are able to continuously pull the lower interest rate rabbit out of the hat.

"They simply borrow short and lend long. With enough liquidity floating around in the markets, these banks are playing on their access to cheaper short-term deposits," said an executive with a leading financial consultancy firm.

The private sector banks are aggressively poaching on the customers of home finance institutions. In the process, they may even push the pure home finance companies out of business, he added.

"The others have raised the bogey of rising home loan rates. A couple of banks have even marginally raised their rates. But that cannot be termed as an industry-wide phenomenon. If they cannot locate cheap funds and work with shrinking margins, it is their problem, not that of the industry."

The chief of a private home finance company said that more than mere interest rates, the "quality of service" will determine whether a customer will stick with a home finance company.

"It is a myth that the Indian home loan market is purely interest rate-driven. Give the customer good quality and he is willing to pay higher interest."

But the consumer does not seem to buy the "quality service" argument.

"I had been paying 13 per cent on my home loan and all efforts to peg it at a lower level yielded no result. I then switched to another company at a significantly lower rate," said Mr Ashish, a customer of the same company.

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