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Banks cut interest rates on home loans

india Updated: Dec 16, 2008 01:08 IST
HT Correspondent
HT Correspondent
Hindustan Times
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Government-owned banks on Monday provided a respite from high interest rates to individuals wanting to buy a house and to the distressed owners of micro, small and medium enterprises (MSMEs).

Led by the State Bank of India (SBI), 26 public-sector banks lowered interest rates on home loans up to Rs 5 lakh to 8.5 per cent and on loans above Rs 5 lakh to Rs 20 lakh to 9.25 per cent, a cut of up to 200 basis points (100 basis points makes 1 percentage point).

About 80 per cent of home loans given by public-sector banks, which account for a little less than 30 per cent of the home-loan market, are less than Rs 20 lakh. Within this, home loans of up to Rs 5 lakh form a “statistically insignificant” part.

Accompanying these loans would be a free insurance cover to the extent of the loan. The banks also waived off processing charges for home loans under these categories.

Borrowers would be able to avail of home loans up to 90 per cent of the property cost for loans up to Rs 5 lakh and up to 85 per cent of the property cost for loans up to Rs 20 lakh.

The new interest rates are applicable only for loans being availed of for the purchase of newly built houses or resale properties — not for swapping existing home loans — because the aim is to generate demand in the economy. Providing relief to existing borrowers is not the aim of the cuts.

The interest rates will be fixed for the first five years, after which borrowers will have the option to either shift to a floating rate or a fixed rate.

If interest rates drop below these rates within five years, the banks will reset the interest rates for these special loans to the prevailing lower rates without the borrowers having to pay any charge. Banks expect to lend between Rs 15,000 crore and Rs 20,000 crore till June 30 under the new package. This will mean funding home purchases of about Rs 30,000 crore. At an average cost of Rs 10 lakh to Rs 15 lakh, this package will fund between two lakh and three lakh houses.

The lowering of interest rates on home loans would reduce banks’ overall net interest margin by just 2-3 basis points, said O.P. Bhat, chairman, SBI.