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Tuesday, Nov 09, 2004

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HDFC to raise housing loan rates

Our Bureau

Mumbai , Nov. 8

HOUSING loans are going to get more expensive from next week.

HDFC (Housing Development Finance Corporation) will hike interest rates on its home loans after Diwali, according to Mr Deepak Parekh, Chairman.

"We plan to raise rates across maturities by 50 basis points next week," he told journalists on the sidelines of a conference here on Monday.

Other banks and financial institutions are expected to follow suit and are likely to convene their asset liability committee meetings shortly.

The pressure on interest rates has been building up steadily in tandem with the hardening of yields in the domestic debt markets.

The 10-year benchmark government paper, the 7.37 per cent 2014, surged on Monday to 7.28 per cent, sharply higher than its levels in the first week of October at 6.45 per cent.

Analysts said a global hardening in interest rates, coupled with rising inflation and a tightening of liquidity in the domestic debt markets, has increased the pressure on interest rates.

Added to this, the Reserve Bank of India, in the mid-term review of its annual policy statement, increased the risk weights that banks will have to assign on home loans to 75 per cent from 50 per cent and on consumer credit to 125 per cent from 100 per cent.

The central bank's rationale for doing so was the strong growth in the housing and consumer credit sector.

The new proposals were meant as a "temporary counter cyclical measure."

Industry analysts are of the view that the RBI's move addressed concerns of an "asset bubble" being created by banks aggressively lending in retail.

The increase in risk weights meant that banks would have to set aside additional capital for their retail portfolios, and it was inevitable that this cost be passed on to customers eventually, according to the analysts.

Said Mr V. Vaidyanathan, Senior General Manager and head (Retail Products), ICICI Bank: "We are also thinking about reviewing our home loan rates. But we haven't decided to what extent we may want to raise it."

But State Bank of India, the country's biggest commercial lender, is unlikely to raise home loan rates in the immediate future.

Speaking to presspersons here on Monday, Mr A.K. Purwar, Chairman, SBI, said, "There is some upward pressure on interest rates and we are examining various issues.

"We are reviewing short-term deposit rates in particular. We are not reviewing home loan rates at present. Lending rates may be unchanged in the near term."

Other housing finance institutions such as LIC Housing Finance and Deewan Housing Finance are also reviewing their rates and are expected to go in for a hike shortly.

"The cost of funds for a housing finance institution will determine how much the rates will be raised, if at all. But the demand for home loans is unlikely to be affected by this. Consumers have seen interest rates ruling at above 15 per cent when they did not even have any fiscal incentives. So a 25-50-basis-point hike will not dampen demand," said Mr Kapil Wadhawan, Managing Director, Deewan Housing Finance.

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