With banks lowering their home loan rates, housing finance companies are soon likely to follow suit to protect their market share. Major banks have reduced their rates since April following implementation of a new interest rate calculation regime mandated by the RBI.
Banks have shifted to a new loan pricing regime — the marginal cost of funds-based lending rate (MCLR) — from April 1.
Under the MCLR, banks need to consider their marginal cost of funds, or the cost incurred on incremental deposits across different maturities. To this, banks will add their operating costs, the negative carry on their cash reserve ratio balances with the central bank and a tenure premium. The move was aimed at making transmission of monetary policy more effective.
On Monday, State Bank of India, the country’s largest lender, reduced its home loan rate by five basis points to 9.40 per cent. The revision in the rate follows reduction in the one-year MCLR to 9.15 per cent from 9.20 per cent. This is the second reduction by SBI since the Reserve Bank of India’s repo rate cut on April 2.
“We have given internal approval to lend at 9.4 per cent. We believe that home loans will continue to be the most competitive segment in terms of rates and most major banks and housing finance companies will lend at 9.4 per cent,” said Ashwini Kumar Hooda, Deputy Managing Director, Indiabulls Housing Finance. Major housing companies, such as LIC Housing Finance and HDFC, the largest player in the home loan business, are also likely to review their home loan rates.
Sunita Sharma, MD and CEO, LIC Housing Finance, said that with banks moving to the MCLR rate, the fall in home loan rates will be a challenge for housing finance companies.
Keki Mistry, Vice-Chairman and CEO of HDFC, said that the lender will be reviewing its rates shortly and take a call on rate reduction.
Incidentally, most housing finance companies have seen a fall in their cost of funds, thanks to base rate reduction by commercial banks and softening in long-term bond yields.
Hooda said that the company is focussing on reducing its bank borrowings, which is relatively costlier, and plans to raise 70 per cent of its funds from non-bank sources, which include bonds and external commercial borrowings.