The Hindu Business Line : Floating home loan rates breach 10 pc

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Kochi Jan. 21 Floating interest rates have surged up by three per cent and millions of housing loan customers has begun to pay a heavy price. A customer who was paying 7.25 per cent for his floating home loans just over a year ago is today forking out as much as 10.25 per cent.

There is more bad news from the banking industry. "Interest rates are likely to move up further in tandem with the sharp surge in inflationary spiral. Most banks would be waiting for the signal from the credit policy to be announced shortly, before raising their prime lending rates," Mr M. Venugopalan, Chairman of Federal Bank, said. Most floating rates are based on the PLR.

Oblivious customers

Several customers seem oblivious to the interest rate revisions since there has been no change in the EMI, but unknown to them, the period of repayment just gets extended. "The interest rate for my Rs 12 lakh housing loan has moved up to 10.25 per cent from the 7.25 per cent that I started out with couple of years back. But I never felt the pinch till I went to the bank for my year-end appraisal," Mr Pravin Kumar, an employee of a pharmaceutical company said.

But some other customers are sitting pretty. "I was quite lucky to have locked up my Rs 17 lakh housing loan at a fixed rate of 7.5 per cent couple of years back. Several of my friends who had advised me to opt for the 0.25 per cent floating rate differential have not been as lucky," said Mr Shilendran, General Manager with a leading hotel group.

Even as the threat of imminent surge in interest rates loom large, the Free Reference Rate of ICICI Bank, the major player in the housing loan sector has already gone up by 50 basis points to 10.75 per cent as on June 2006 and every new customer would be granted loans at the rate of 9.5 to 9.75 per cent. The fixed rate is already hovering at 11.5 per cent. Further revisions would take the rates beyond the 10 per cent levels even for new customers.

Higher rates

The PLR of HDFC has already moved up to 12.5 per cent from the 9.5 per cent levels that were prevalent couple of years back. New customers are provided floating rates at less than 3.25 per cent of the PLR. Fixed home loans reign at 11 per cent.

Thinning spreads

But banks are not minting money from the rising rates, Mr Venugopalan said. Constrained by a sharp spurt in credit off-take that has not been accompanied by a corresponding jump in deposit growth, most banks are confronting thinning spreads. As the CRR has been revised to 5.5 per cent and SLR at 25 per cent, banks have fork out as much as Rs 34 for every Rs 100 mobilised as deposits.

Banks that mobilised huge housing loan portfolios at low fixed rates are likely to witness greater pressure from thinning spreads.

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