Home loan market set to get competitive as lenders cut rates

Mumbai: ICICI Bank Ltd on Thursday cut interest rates on home loans by 15 basis points (bps), setting off a rate war in the home finance market.

The bank cut the interest rate on home loans up to Rs 75 lakh to 9.20% from 9.35% for male customers. The interest rate for women has been lowered to 9.15% from 9.30%.

For underprivileged customers, loans up to Rs25 lakh have been repriced to 9.15% from 9.30% earlier. The new rates became applicable starting 1 November, the bank said in a notification on its website.

One basis point is one hundredth of a percentage point.

The reduction in home loan rates follows ICICI Bank’s 10 bps rate cut in the one-year marginal cost based lending rate (MCLR), reduced to 8.95% on 28 October.

The private sector lender’s move is in response to the new home loan rates announced by State Bank of India (SBI).

India’s largest lender has cut its home loan rate to 9.15%, a cut of about 15 bps. Home loan rates for SBI’s women customers has been dropped to 9.1%.

The new rates are being offered under SBI’s festive season offer. The state-owned bank is also offering a waiver on processing fees on home loans for customers who want to buy SBI approved projects and are applying online, those who want to transfer their home loans to the bank, and certain government employees.

The housing finance market is currently dominated by SBI, which had a home loan portfolio worth Rs1.97 trillion, as on 30 June. In comparison, ICICI Bank had a home loan portfolio worth Rs1.13 trillion at the end of the first quarter.

According to Sumit Bali, senior executive vice-president and head-personal assets at Kotak Mahindra Bank, lenders have been passing on the benefit of falling interest rates in the system to their retail and small and medium enterprises (SME) customers over the last few months and the festive season should see more such offers coming up.

Between August and September, Kotak Mahindra Bank ran a special monsoon offer where it waived processing fees for home loan customers who were also given an interest rate of 9.35% on their new loans. According to Bali, the bank may look at reintroducing these offers, depending on market conditions.

“Our six-month MCLR, which is the basic rate on which we price our home loans, is at about 9.2%. Presently, we are charging a premium of about 5 bps and we can reduce it to nil, depending on the customer profile. We wouldn’t want to lose our customers over a 5-10 bps difference,” he added.

As experts see it, lenders will be using festive season demand as a means to prop up their lending portfolios which have been growing slowly over the most of this financial year.

“As of now, lenders are being quite selective in announcing festive offers. As corporate loan growth has been lagging for many quarters now, home finance seems to be the safest growth option for banks. Whether these rate reductions would go beyond the festive season, will determine if we are in a rate war- type situation,” said Karthik Srinivasan, senior vice-president and co-head of financial sector ratings firm Icra Ltd.

According to fortnightly data released by the Reserve Bank of India (RBI), as on 14 October, the outstanding non-food credit for the banking system was reported at Rs72.7 trillion, showing only a 9% year-on-year growth.

In comparison, home loans have been showing a growth of at least 18-20% year-on-year for the past many months and stood at over Rs8 trillion at the end of September, RBI data shows.

India’s largest mortgage lender Housing Development Finance Corp. (HDFC) Ltd, too announced it would reduce its lending rates by 15 bps, with effect from 4 November.

“Over the past couple of months, we have seen a drop in our marginal costs of funds and as always HDFC has ensured that benefit is passed on to its customers,” said HDFC managing director Renu Sud Karnad.

As of 30 September, HDFC’s overall loan portfolio was reported at Rs2.75 trillion, up 17% year-on-year. Individual loan disbursements grew by 20% during the half-year ended September, the company had said.