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Banks set to finalise home loan package

By BS Reporter in Mumbai
December 11, 2008 11:01 IST
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In an effort to boost credit flow to the housing sector, public sector banks are going to finalise the new interest rate regime for home loans up to Rs 20 lakh (Rs 2 million) on Thursday.

In addition, the banks are considering a reduction in interest rate on loans to small and medium enterprises (SMEs), while they still deliberate on a reduction benchmark prime lending rates.

Sources said that the Indian Banks' Association is scheduled to meet in Delhi today to decide the ceiling interest rate on housing loans up to Rs 5 lakh and a separate cap on home loans between Rs 5 lakh (Rs 500,000) and Rs 20 lakh. They will then present the package to the finance ministry and start implementing the scheme over the next few days.

Among the options under consideration is capping the rate on loans up to Rs 20 lakh at 9.5-10 per cent for the next few years. "The modalities will be worked out today," said a source who will attend the meeting.

On reducing benchmark prime lending rates (BPLR), there is no unanimity and the government is also not pushing them to lower rates. "If the BPLR is cut, nearly 60 per cent of the benefit goes to the corporate sector, while SMEs and retail customers are smaller beneficiaries. With Lok Sabha elections round the corner, the government is also more focussed on ensuring that the benefits accrue to SMEs and retail customers," said a banker.

"It is not necessary that banks take signals immediately. The cost of funds has to come down before rates start going down. We hope that to happen over the next 15-20 days. What is more important is that those who really need money and are unable to afford it due to high rates or liquidity problems get access to funds," said a source.

Bankers and government officials said that banks lowered their benchmark prime lending rates only last month factoring in the lower cost of funds.

After the Reserve Bank of India announced the latest monetary measures including 100 basis point reduction in repo and reverse repo rates, only three lenders – HDFC Bank, Union Bank of India and Yes Bank – have lowered prime lending rates. While the State Bank of India's asset-liability committee has met, it is yet to take a call on reducing rates.

ICICI Bank, the country's second-largest lender, is yet to lower its deposit rates though most large players have decreased the rates at the start of the month.

The bank is still deliberating if it needs to lower lending rates. After an aggressive battle to grab market share over the last few years, this year, ICICI Bank has lowered its credit growth target.

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BS Reporter in Mumbai
Source: source

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