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Priya Nair

The cost of funds for banks would increase if the RBI's woking group suggestions were accepted and home loans could become dearer.

Mumbai , Oct 2

THE home loans market may lose some of its sheen if Reserve Bank of India accepts the recommendation of its working group on priority sector lending.

The group has suggested that home loans, which have been a major profit earner for most banks, should be excluded from priority sector lending.

This could have major implications, as faced with higher cost of funds banks may be forced to hike home loan rates, say bankers.

A senior UTI Bank official said the impact of this might not be immediate, as banks have built large distribution networks in home loans and demand from customers is also strong. However, in six-eight months there could be an increase of about 25-50 basis points in home loans rates, he said.

RBI's reasoning is perhaps that banks have become too aggressive on home loans. Through its policy signals, it may be trying to nudge banks away from home loans and towards agriculture, he said.

At present, loans up to Rs 15 lakh to individuals for construction of houses and Rs 2 lakh for repairs are eligible for consideration under priority sector lending.

Mr Rajan Ghotgalkar of IDBI agreed that cost of funds for banks would increase. As of now, home loans can be re-discounted with National Housing Bank and this gives access to banks to obtain long-term funds, which are comparatively low-priced.

But if RBI goes ahead with this suggestion, it would reduce refinance opportunities considerably and thereby increase cost of funds. This could result in higher rates for the borrower, he said.

"Home loans as part of priority sector encourages banks to give small loans up to 15 lakh, in tier-II or tier-III cities," he said.

The working group report said that home loans accounted for the highest share of priority sector advances at 20.5 per cent in 2003, up from 14.3 per cent in 2002.

Mr Rajiv Sabharwal, General Manager, ICICI Bank, said that the mortgage market in India was still under-penetrated. The demand-supply gap is about 22 million houses.

"In any developed economy the mortgage market is huge. The risk is also lower than a normal loan. With a growing economy and higher incomes, people would want to buy homes. So, it is a good idea to continue with priority sector status for home loans," he said.

However, according to Mr Puneet Chaddha, Head, Retail Assets, HSBC India, the impact would be marginal.

"Only those home loans which are below Rs 15 lakh and for self-construction are considered as priority sector. Most of our loans are not for self-construction. So, the impact would not be significant," he said.

The group has suggested excluding housing loans from the classification of priority sector advances, while retaining other sectors such as agriculture, small-scale industries, retail trade and education, subject to certain conditions.

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