UPA bats for cut in home loan rates

2008-02-05T23:21:00.000-08:00

NEW DELHI: Political pressure is building on banks to cut home loan rates. Ministers handling key portfolios in the government have already conveyed as much to some bank chairmen, and finance minister P Chidambaram is expected to hardsell softer interest rates when he meets the bank chiefs on February 12. Banks are likely to oblige on loans below Rs 20 lakh, considering the strong deposit growth and easy liquidity in the system. The FM cannot give a diktat to public sector banks, and any such “request” will have to be made informally.

The UPA government is under pressure from its political allies, most of whom are rooting for lower interest rates in their pre-Budget demands. The opposition BJP is also expected to use the high interest rate regime under the UPA government as one of the main poll issues. With as many as 10 states going to polls this year, the government does not want to take chances and may impress upon banks to cut rates.

“In his meeting next week, the FM is expected to ask banks to cut rates. We are already getting indications,” a banker said. They feel home loan rates are already low. But if rates have to be brought down, only loans below Rs 20 lakh will be given the benefit, since they are classified as priority sector loans. Also, if banks have to indeed cut rates, they may do a symbolic reduction in home loan rates, but offset the decrease by hiking rates across the other categories.

“The finance minister has alluded to a rate cut in the past. But he has been very diplomatic and articulate about making such requests. This is usually perceived as an informal request. To be fair, he has always maintained that rates should be softened for productive sectors. The government will come in for a lot of criticism in case it instructs banks for a rate cut,” another banker said. Signalling interest rates is very much a prerogative of the Reserve Bank and banks can set rates keeping profitability in mind, he added.

“Effecting a 25 basis point cut in retail loans does not mean anything. It is just symbolism. Ultimately, banks will have to factor in profitability and NIMs. Private players were quick to hike rates and therefore, they are the first to bring it down,” a top banker said.

Last week, housing finance company HDFC set the ball rolling by cutting a 25 basis point cut in its retail prime lending rate (RPLR) to 13.75% with effect from February 1. This has put pressure on other lenders to follow suit.

The largest private bank, ICICI Bank, has said there could be softening of rates in the first quarter of the next fiscal starting April. The State Bank of India, currently, charges between 10-11.5% for loans up to Rs 20 lakh.

Meanwhile, Canara Bank became the first public sector bank to cut 25 basis points on home loans effective February 7. On the back of a robust deposit growth and ample liquidity, the bank cut rates after a review by its Assets and Liabilities Committee.

Loans up to Rs 20 lakh constitute nearly 80% of the total housing loan portfolio. Home loans form 12-35% of loan portfolios of banks. The total housing loan portfolio of banks and housing finance firms is about Rs 2,00,000 crore of which state-owned banks account for more than Rs 1,40,000 crore as of March 2007. Home loans have grown by a modest 15%, according to RBI. Personal loans account for around Rs 4,50, 000 crore as of January 2008.

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source from:-http://economictimes.indiatimes.com

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UPA bats for cut in home loan rates