Banks seem to be showing a distinct preference for growing their home loans within retail loans during the ongoing festive season, going by the recent interest rate cuts effected by them.

Most of the banks have announced reduction in home loans interest rates, which are now at an all time low, but interest rates on other loans such as vehicle loans and unsecured personal loans have been left more or less unchanged.

Among the banks that have announced home loan rate cuts during the ongoing festive season include Kotak Mahindra Bank (from 6.65 per cent to 6.50 per cent), State Bank of India (from 6.80 per cent to 6.70 per cent), Bank of Baroda (from 6.75 per cent to 6.50 per cent), Punjab National Bank (from 7.10 per cent to 6.60 per cent on home loans above ₹50 lakh), and Union Bank of India (from 6.80 per cent to 6.40 per cent).

Depending on a prospective borrower’s credit score, the banks would add credit spread to the aforementioned rates.

This cut in home loan rates comes even as industry experts believe there could be a dampening effect on the demand for cars (and in turn for loans to buy them) due to manufacturers passing on increase in raw material prices to customers in the last few months and rising fuel prices.

Also read: Healthy growth in home loans, may consider extending festive offer: Kotak Mahindra Bank

Bankers are also wary of the possibility of stress building up in the unsecured personal loans portfolio.

Further, banks no longer enjoy the advantage they had over gold loan companies (GLCs) last year (between August 6, 2020 and March-end 2021), when the Reserve Bank of India (RBI) allowed the former to offer loans for up to 90 per cent of the value of gold ornaments and jewellery to mitigate the economic impact of the Covid-19 pandemic on households, entrepreneurs and small businesses.

Now, with a level playing field having been created (both banks and GLCs can offer loans up to 75 per cent of the value of gold ornaments and jewellery), nifty GLCs can attract the customers they lost to banks during the aforementioned period.

Low risks

Banks consider housing loans as the best bet to grow their retail loan portfolio due to the relatively low risk of default, lower risk weights (whereby the minimum capital that needs to be set aside to mitigate default risk has been brought down up to March 31, 2022) and availability of strong collateral, according to banking expert V Viswanathan.

As per the monetary policy report, in respect of fresh rupee loans linked to the policy repo rate, the spread – weighted average lending rate (WALR) over the repo rate – charged by domestic banks during August 2021 was the lowest in the case of housing loans and the highest in the case of other personal loans, in line with their risk profiles.

In the case of home loans linked to external benchmark, the spread of WALR over the repo rate during August 2021 was 3.19 per cent for domestic banks. The aforementioned spread in the case of vehicle loans and other personal loans was at 3.60 per cent and 4.98 per cent, respectively.

Repo rate is the interest rate at which banks draw funds from RBI to overcome short-term liquidity mismatches. Currently, this rate is at 4 per cent.

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