The Hindu Business Line : A move to `fix' the loan shift

THE first indications that interest rates were bottoming out came when housing loan customers began sniffing the market for fixed rate loans about two months ago.

Housing loan companies reported increased enquiries from existing customers who wished to switch over from "floating rate" to a "fixed rate" loan.

Fixed rate loans for similar tenors were priced at about half percentage point higher than the then prevailing floating rates. It didn't seem to matter for customers. They sensed that interest rates, which had fallen from levels of 14 per cent in 2000 to about 7.5 per cent in mid 2004, were now headed towards higher levels.

Never mind the talk of continuing with "soft rates" from Finance Ministry, regulatory authorities and senior bankers. The need to lock into lower rates drove the savvier customers to press for "fixed rates."

HDFC, the leading housing finance company increased its loan rates by 0.25 per cent a few weeks ago. State Bank of India with a housing loan portfolio of about Rs 18,000 crore also increased rates on Monday. It came out with a hike of 0.25 per cent for loans up to 5 years and a hike of 0.50 per cent for loans beyond 5 years. The new rates will be 8 per cent for 5-year loans, 8.75 per cent for 5 to 15 year loans and 9 per cent for 20-year loans.

The rate hikes are being done for fresh loans and for those who want to shift from floating to fixed loans. Existing customers will not be affected. To put the hike in perspective, new home loan customers will pay an additional Rs 260 more per month to SBI, for a Rs 10 lakh loan with a ten-year tenor. Since there was no announcement with regard to any corresponding increase in floating rates, the move is being interpreted strictly as a move to discourage the shift towards fixed loans.

Will other banks follow suit?

For the moment, bankers seem to be in the wait and watch mode. Mr S.C. Gupta, Chairman and Managing Director, Indian Overseas Bank, said he had no plans to increase either the floating or fixed rates for housing loans immediately. He said, "We'll watch the inflation figures and the monetary moves closely. Ee have not had any problems with our housing loan targets. For the time being, say the next one to two months, we will maintain the status quo."

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