PSBs to give home loans at concessional rate of 9.5% for 5 years

Public sector banks (PSBs) have decided to give home loans of up to Rs20 lakh at a concessional rate of 9.5% for a period of five years. This decision of PSBs comes as part of the government’s fiscal incentive package announced on Sunday to encourage spending and boost drooping economic growth.

Two senior bankers involved in devising the package who didn’t want to be named informed that all new home loans advanced by state-owned banks until 30 June will now carry the 9.5% rate, which will be reset after five years according to the prevailing trend. Soon public sector banks will make a formal announcement of the scheme. The plan was confirmed by the two other officials of two different ministries, who also didn’t want to be named.

In the past four years economic growth has slowed down from an average annual pace of 8.9% therefore government is focusing on housing as one of the key areas for the up liftment of the economic growth. Lower interest rates prop up the demand for homes, which in turn, creates demand for steel and cement and generates jobs in the construction sector.

At present banks and housing finance firms are charging between 12% and 14% for fixed-rate home loans and offering floating-rate mortgages at between 9.5% and 11.75%.

According to analysts as the cost of funds for banks is currently higher than the rate at which they are offering loans under the new scheme, the government might work out an arrangement to compensate the lenders.

One banker while expressing his views said though it is not clear what will be the nature of the arrangement but “certainly not subvention”. The government is offering 3% subvention—or interest subsidy—on small agricultural loans, which are given at a concessional rate of 7%.

On Saturday the Reserve Bank of India’s (RBI) took a decision to include home loans of up to Rs20 lakh in so-called priority sector lending—targeting at segments such as agriculture, small industry and education—will now come in handy for banks to offer mortgages at a concessional rate.

According to banking industry guidelines, 40% of advances are intended to be channeled to the priority sector. And Banks that are not able to meet the target are required to invest the shortfall with the National Bank for Agriculture and Rural Development at a low interest rate. The money is used for rural infrastructure projects. Analysts believe the five-year fixed rate of 9.5% will hollow banks’ profitability if the government doesn’t offer a support plan for lenders in case interest rates remain at this level or rise further. In case interest rates drop, consumers will lose out on the benefit of falling rates.

“If interest rates fall and home loan rates come down below 9.5%, we will have to watch what exit options this package would provide. Many questions of potential borrowers might have to be answered before they go ahead and avail of such loans,” said Ravi Sankar, a banking analyst at Antique Stock Broking Ltd, a Mumbai-based brokerage.

Sankar said the asset quality of banks may be compromised if they try to move forward the scheme aggressively.

“This rate is quite attractive for borrowers at the moment,” said Hatim Brochwala, an analyst at Khandwala Securities Ltd, another domestic brokerage. “However, if interest rates fall and home loan rates become cheaper, borrowers might start complaining. So, the banks will have to chalk out an exit plan. Converting fixed rate into floating rate (loans) may not be a good option as the penalty is heavy.”

Analysts are hoping that interest rates will come down by 300 basis points in two years and home loan rates will become cheaper than 9.5%. One basis point is one-hundredth of a percentage point.

a special refinancing package of Rs4,000 crore was announced by the RBI for the National Housing Bank, which control housing finance firms, to help prop up the home loan market. According to analysts the refinancing facility is too small.

Housing Development Finance Corp. Ltd (HDFC), India’s oldest mortgage firm, has set a target of about Rs45,000 crore for the distribution this year. As HDFC accounts for at least 40% of the housing loan market, public sector banks structure about 20%, limiting the scope of the incentive package, analysts say. ICICI Bank Ltd, India’s largest private sector bank, at present is a prominent lender in the mortgage market.

Government signals to interest subsidy to make home loans cheaper

An anonymous senior government official told that government is thinking of a proposal to make home loans cheaper for consumers through interest subsidy, with an aim to encourage demand in the realty sector which has a sequel effect on many industries like cement and steel.

In the proposal there will be provision for providing loans at below market rates to real estate developers. But the loan to be disbursed under this will have a number of conditions like an upper ceiling on selling price of flats and individual homes.

The entry limit for loans will probably be around Rs 10 lakh, as it is expected that nearly 75 per cent of the housing loans will be below Rs 7.5 lakh. Only developers who own the land or already are in the middle of a housing project will be eligible for the government subsidy. An official informed that individual planning to construct homes on their own would also be eligible.

The panel of secretaries headed by Finance Secretary Arun Ramanathan has given a suggestion to the urban development ministry to prepare a note in this regard and present it to the apex committee headed by Prime Minister Manmohan Singh.

The apex committee has the authority to take the final decision on the proposal. A senior government official said, “Discussions were held on this proposal which includes making available loans at around 8 per cent interest rate, which could remain fixed for a period of around five years. The government will pay for the balance interest amount”.

In the last one year the interest rate charged by commercial banks in India has risen sharply, while the prime lending rate of certain banks has increased above 14 per cent as against around 9 per cent a year ago. This has deterred many home buyers to postpone their home purchases and also increased loan repayment amount.

Therefore to avoid a repeat of sub-prime like crisis in India, credit worthiness of borrowers will be scrutinized as in normal loans.

Debate on this measure is being done to ensure that the demand in the economy does not slow down. According to the sources, “If the housing sector does not kick off in the next two to three months, it could have a domino effect. Currently, most housing projects are stuck because of the liquidity crunch. A boost to this sector will mean additional demand for cement, steel and other material, which is likely to stimulate the economy. Moreover, it would also ensure that jobs in the sector are not lost”.

As per analysts views nearly 80 per cent of the total real estate demand get instigated from the housing sector. It is believed that by 2010, nearly 530.5 million square feet of residential space will be developed in the premium category alone in seven major cities, which indicates to the supply of 200,000 units per year in the middle income group (MIG) and high income group (HIG) segments.

According to Indicus Analytics estimation between 2008 and 2015, 17 million additional dwelling units will be needed.

Banks to focus on home loans between Rs 10 lakh and 15 lakh

Since the reduction in interest rates of home loans people have started planning for buying their dream house. Banks have also started giving loans for buying house however the banks are now planning to emphasize on home loans which are below Rs 25 lakh.

The bankers are expecting an increase in the demand for small ticket home loans; therefore they are taking steps to persuade the customers with speedy procedures and attractive offers.

“There is a 75 basis point reduction in the interest rates on home loans. This will drive demand,” Mr R.S. Reddy, Chairman and Managing Director, Andhra Bank, told Business Line.

He informed that the bank main focus will be on home loans between Rs 10 lakh and 15 lakh as it would “definitely help profitability”.

Ms Renu Challu, Managing Director, State Bank of Hyderabad, pointed out that the recent reduction of capital requirement for home loans by the RBI will also help in aggressive lending by banks.

“Definitely, there will be a big push. SBH will also push home loans below Rs 20 lakh and 25 lakh aggressively. It is a priority sector for us,” she said.

Many other banks are also making housing loans as a priority.

“To regain the momentum, there should be a little effort from the builders’ lobby as well. They had taken the prices to unaffordable levels which should be brought down,” Mr Reddy said.

He added there is news that some builders are offering special discounts and bringing down the prices in order to push up the demand.

On the other hand the builders are happy with renewed home loan rates of banks. “The coming down of home loan rates will be beneficial for the end-users in buying properties at a better price. The developers will also be benefited as it will reduce lending cost,” said a spokesperson of real estate major DLF.

“DLF has increased its focus on mid-income housing and is already working on thin margins of 35 per cent which rules out price reductions. However, our offerings targeting mid-income groups are going to be well within the reach of consumers,” he added.

As per RBI data, the loan growth in the housing sector had slowed down slightly in the second quarter of the current fiscal year. But grew at about 14 per cent (Rs 32,792 crore) up to August 31, 2008 compared with Rs 34,333 crore in the year-ago period.

Arcil records show increase in home loan defaulters

There has been an increase in the number of defaulters on housing loans as individuals are facing the brunt of the high interest rate regime. The indication about this is the fact that the total security receipts (SRs) of Rs 1,100 crore issued by Asset Reconstruction Company (India) Ltd (Arcil) to banks between April-September 2008 for acquiring bad loans 20% were from home loan defaults.

Asset Reconstruction Companies (ARCs) is expecting further rise in housing loan defaults in the coming quarters in case the interest rates do not climb down. Said Arcil, managing director & CEO, S Khasnobis: ‘‘the retail loans, mainly housing loan default, form about 20% of the total SRs of Rs 1,100 crore issued by Arcil between April-September 08. The portion of Arcil's acquisition comprising retail loans is likely to rise given the current environment.'' When an ARC attain bad debts from a bank, based on a valuation they either pay cash or issue SRs which are under the hold of a trust and are redeemed after realization of assets.

Arcil, is the leader in attaining distressed assets, have acquired these bad loans in question from around 20 banks. However details of individual banks is not available, it appears that ICICI Bank's portion of the total SRs issued by Arcil stood around 30%. As per ICICI Bank report, the total value of bad loans sold by the bank to Arcil April 2008 onwards stands at Rs 608 crore for a sale consideration in excess of 62% of the gross loan book. Though it is not clear whether portion of this comprises retail loan defaults.

According to an ICICI Bank spokesman ‘‘Sale of retail NPAs has been one of the many tools adopted by the bank to proactively manage delinquencies in the portfolio. It is a standard activity undertaken in the normal course of business by all international banks. Sometimes the sale is conducted every quarter. Also, this is only a very small portion in the overall delinquency management strategy of the bank.''

Moreover NPAs have an adverse impact on shareholders' value of banks and financial institutions by bringing down margins. ARCs attain bad assets at a discount depending on the credit realization potential of the asset.

An industry expert said that banks in the further will be increasingly using ARCs to skim off their distressed retail assets so that they are not required to smear their hands in dealing with bad retail loans.

An official from ARC said although bad retail assets offer a huge opportunity, but it requires the right machinery (read, people) to gain monetary realization from such assets. Since beginning (August 2003), Arcil has been able to acquire total distress debt including overdue interest of over Rs 40,000 crore at an average valuation of 25%. Since setup SRs issued amount to approximately Rs 10,000 crore. So far, Arcil has already been able to resolve 65% of the non performing loans acquired till now and have recovered and distributed about Rs 2,800 crore to all the SR investors.

NHB expects fall in home loan rates by January

According to the National Housing Bank (NHB) interest rates on home loans are expected to slope down from January.

In an interview to the The Telegraph S. Sridhar, chairman and managing director of the NHB, told, “Interest rates are likely to come down from January and we expect the home loan rates to fall after that.”

He said after the Reserve Bank of India hiked the interest rates there has been spurt in home loan rates. “We expect home loans to stabilize to around 10 per cent in the near term.”

Sridhar informed that there has been increase in the disbursal of home loans and the rising interest rate had not affected it.

In the last fiscal year, there was a healthy growth of 20 per cent in home loans. Whereas disbursal of home loans by banks was about 14-15 per cent, loans from financial companies grew 24 per cent.

“This year, too, the trend appears to be similar, but it is too early to form a definitive view,” he said.

Sridhar said the bank has launched NHB Residex to keep check on residential property prices in Delhi, Calcutta, Mumbai, Bangalore and Bhopal.

He said 10 more cities will be added in the list in the next two months and over 60 cities will be covered over the next two years. The index would be revived every six months, to get a good idea of the property prices in the country and city-specific realty movement.

Recently NHB has picked up a 12.5 per cent stake in Mahindra Rural Housing Finance Ltd, a wholly owned subsidiary of Mahindra and Mahindra Financial Services Ltd, but the amount has not been disclosed, and will continue to focus on rural housing finance.

Sridhar informed bank will soon be launching fixed deposit products and the capital will be used to fund rural homes

“We are studying the market condition. We will launch fixed deposit products soon. Given our changed focus to facilitate rural housing and growing business in terms of loan refinancing and direct project financing, we have decided to mobilize public money through fixed deposits,” he said.

Only few senior citizens applied for reverse mortgage scheme

This year banks have introduced reverse mortgage scheme for senior citizen to help them get loan against their houses so that they do not face any financial crush in their need of time.

As per the data available only 2,000 senior citizens across the country have taken loan against their houses under the reverse mortgage scheme. Amongst the 18 banks and two housing finance companies are offering the scheme, State Bank of India alone has given a majority of the 1,900 loans.

The National Housing Bank (NHB), which developed the scheme for the people aged above 55 years, think that the poor show is because of lack of awareness among senior citizens, whose number stands at 76 million as per the records of 2001 census data, and lack of enthusiasm on the part of the banks.

Therefore NHB has decided to sign agreements with NGOs and corporate foundations to bring the awareness about the unique mortgage program under which a senior couple can continue to live in the house while getting the market value of the house minus ten per cent. Following this NHB on Tuesday signed an agreement of cooperation with Anil Dhirubhai Ambani Group’s social outfit, Harmony, to work with the bank to make the program successful.

S Sridhar, chairman and managing director, NHB said, “The bank is also nudging insurance firms to start an insurance package for people who have outlived the 20-year coverage under the reverse mortgage scheme”.

“The scheme does not compel anyone to part with their house,” Sridhar adds. In case the senior couple decides to repay the loan amount then they will get the house back. Even heirs can do that. He said they can resell the property and profit later.

Once a couple go for this option, they can either take the entire money for their house in installments or will be eligible to get a lump sum up to a total of Rs 15 lakh. Sridhar said but, this can be given only on medical grounds. In the meantime, the couple will be able to continue to reside in the house.

He informed that the maximum installment can go up to Rs 50,000 a month and the valuation of the property will be done by the beneficiary himself.

Bankers, who were busy with queries from senior citizen at forums, said that if the property is in the name of the wife and she dies early, the husband can continue to live there till he dies.

He said that the eligibility for availing the scheme is 55 for women and 60 for men. State Bank of India General Manager Sharad Sharma says, “The depreciation in the value of the property is a risk against which the banks have no cover.”

IDBI to pay Rs 50,000 compensation for harassing a customer

IDBI has been directed by the District Consumer Disputes Redressal Forum to pay Rs 50,000 as compensation for harassing a customer. The petitioner had taken a home loan of Rs 13 lakh in 2004. The bank has been charged of raising the rate of interest illegally therefore has been directed to revamp the loan account and not change the rate of interest for the first three years as per the agreement. The forum has also asked the bank to pay Rs 5,500 as litigation costs.

The complainant, Pardeep Tayal, a resident of Sector 35, took a housing loan of Rs 13 lakh in 2004, which was to be paid back in 96 equated monthly installments (EMIs) of Rs 17,724.

Bank has mentioned in the letter delivered to him that the interest rate will be reviewed at the end of three years from the date of final disbursement. But, he was then sent three letters intimating that the rate of interest has been revised to 7.5 per cent, 8 per cent and 9.5 per cent, respectively.

Claiming the action of the bank in reviewing and enhancing the interest rate before the expiry of three years as unwarranted and amounting to deficiency in service, hence the complainant moved the forum.

The Bank, in its response, stated that the complainant had chosen for a floating rate of 7 per cent, which was subject to resetting of interest rate as per the home loan agreement.

The forum established that as per the agreement, there cannot be any change in interest rate in the first three years, which is to remain at 7 per cent. The forum held: “The bank cannot just issue a letter and change the terms of the agreement to the disadvantage of the complainant.”

In case of fall in home prices banks can seize your house

Most of the lender banks have hiked the lending rates but have left home loan untouched. Recently, the chairman of a major housing finance company found that house prices have declined by 15-20% in some pockets. This is good news for aspirant home buyers. But if you have taken loan then it is not good because the value of your investment is going down. There is more important for this although you have been constantly paying your EMIs your house is potentially under threat. Get the latest updated home loan rates here and also some facts to get approved for the loan fast.

All the home loan lenders are adding a clause in the mortgage agreement which gives them the power to seize the property or ask you to bring in extra collateral if house prices are falling dramatically. In case you are not able to do so, the bank might term you as defaulter, giving the bank the right to seize and sell the flat or house bought on the home loan.

Trouble comes from an inoffensive sounding "Depreciation of Security" clause, one of the 15-and-odd clauses that constitute an "event of default" in case of a home loan.

Usually, a default is when the borrower of the home loan cannot carry on paying the equated monthly installments (EMIs) to repay the loan. This is because the definition of default on a home loan is a bit more complicated than that.

According to "Depreciation of Security" clause: "If any property on which the security for the loan is created depreciates in value to such an extent that, in the opinion of the bank, further security should be given and such security is not given".

What does this legally mean? Bank gives a home loan against the house as security. In case the borrower is unable to repay back the loan, the bank can recover the loan by simply selling the flat or house. In such case the market value of the flat at any point of time should be greater than or equal to the home loan that is still outstanding.

To protect itself, the bank can ask for some extra security or collateral and if the borrower fails to do so, the bank can term him a defaulter. Then the loan outstanding becomes due and immediately payable and the bank has the right to take possession of the house or flat and sell it to recover the balance.

Let us try and understand this through the example of an individual who bought a flat worth Rs 25 lakh. The bank gives him a home loan of Rs 20 lakh and he puts in the remaining Rs 5 lakh from his own sources.

By insisting on the borrower contributing Rs 5 lakh, the bank builds in some margin of safety. After buying the flat, if the market price falls by more than 20% and goes below Rs 20 lakh, the bank can insist on some extra collateral like gold, other property, etc., from the borrower. If the borrower does not come up with this extra collateral, the bank can label him a defaulter and seize the flat.

Kamlesh Rao, vice-president and business head of personal finance at Kotak Mahindra Bank said that this clause have not been invoked till date. He added, "Typically, in case of a home loan, additional collateral may not be asked for. I haven't heard of any such instances". "If property prices fall further there will be an issue under home loans. But that is the risk of the business," he stated.

Sujan Sinha, senior vice-president, retails assets, of Axis Bank says: "Prices have not cooled off. But the worry remains if property prices correct. Right now we have not asked for any additional collateral, but if prices fall below the loan outstanding then it becomes an unsecured loan and additional collateral may be asked for." Some bankers claim that even if property prices are correct there is the margin and the cash component, or the 'black' component, which acts as a cushion against a fall in the value of the house.

According to banker’s retail home loan borrowers are relatively on safer side, the same cannot be said for corporate borrowers who have used property as collateral. "It may happen in the case of working capital loans, bank lines of credit or loan against property where the value of the collateral is specified during the sanction of the loan.

In such instances, if the value of the security goes down, then the borrower may have to provide additional collateral," says Rao of Kotak.

Tata Capital to venture in home loan business by 2009

Tata Capital Limited a wholly-owned subsidiary of Tata Sons Limited will soon be entering into the thriving home loan business by March 2009. This was disclosed by its Managing Director and CEO, Mr Praveen P Kadle. He said, “Although we will be a late entrant in this market, we see good business opportunities in offering home loans. We hope to start this by March next year”.

Tata Capital, is a non-banking finance company, started its operations in 2007. With this Tata Group made entry into a host of new financial services. Currently, the company has a capital of about Rs 2,000 crore and is offering suite of products across multiple financial domains—personal loans, car loans, distribution and broking, wealth management, SME Finance, capital markets, private equity and infrastructure finance.

Mr Kadle also informed by end-September Tata Capital will be launching its first private equity fund which will be targeting on opportunities in mid-sized companies. He added the size of the fund is yet to be finalized, there are indications that the initially fund size may be around $ 250 million. Company is also planning to launch a venture capital fund focusing on the technology space (information technology/telecom).

At present Tata Capital balance sheet is around Rs 4,000 crore. On being enquired whether the company will be looking at inorganic growth, Mr Kadle said that most of the opportunities here were expensive. He said, “Indian valuations are expensive. Inorganic growth may not be attractive, but that does not mean we will not look at inorganic growth”.

Moreover, Tata Capital will soon be venturing into insurance broking. “A subsidiary of Tata Motors has got license for insurance broking from IRDA. This company would eventually come under Tata Capital. We will also get into commodities broking soon”, Mr Kadle said.

On being enquired whether Tata Capital is consider listing of its shares in the coming months, Mr Kadle inforemed that the company was not looking at listing now.

Reliance Capital hiked home loan rate after RBI

Reliance Capital, Anil Ambani-led Company offers property loans. Following on lines of large banks like PNB, ICICI Bank and Axis Bank Reliance Captial has also increased its lending rates on property loans by 0.50 per cent to 14.25 per cent with effect from August 1.

As per public announcement made by the firm sources stated, "Reliance Capital announces a 50 basis point increase in the lending rates for its entire floating rate linked products-- Mortgage and SME Loans".

The announcement stated loans taken on fixed interest rates will not be affected by the PLR hike. Only the loans taken on floating rates have been revised. Earlier to the increase, the prime lending rate of RCL was at 13.75 per cent.

Reliance consumer finance, an ADA Group firm, as on June 30 had a loan book size at Rs 8,094 crore, also provides personal loans, vehicle loans (car and commercial), home loans, loan against property and SME loans.

Reliance Consumer Finance produced revenues of Rs 262 crore in the June quarter, against Rs 7 crore in the corresponding period a year ago.

The company has hiked rates a week after the Reserve Bank hiked the mandatory cash deposit by banks by 0.25 per cent and short-term lending rate to banks or repo rate by 0.50 per cent.

After RBI’s decision most of the private and public sector lenders have revised PLR and deposit rates upward. Country's second largest public sector lender, Punjab National Bank, increased its prime lending rate to 14 per cent.

How to manage home loans in difficult times

In the recent times inflation has reached two digits, the Reserve Bank of India (RBI) increased repo rates and CRR. As a result banks have hiked the interest rates. Till now assumptions are being made in the market whether the interest rates will climb further, remain stagnant or decrease over a period of time. But in reality hike in home loan rates have driven the budget of households out of gear. Previously income was more, but now the positioned has changed EMI’s have risen considerably and monthly salary is unable to keep pace with the growing expenditure. People are trying hard and searching ways to make the ends meet.

Don’t get tensed here few tips to help you in tackling high home loan rates.

1. Generally banks lock the fixed rates for a fixed period of around 3 years. In the current circumstances if you are worried whether the prevailing floating rates on home loans can exceed the fixed rate, can try to convert their floating rate home loan into a fixed rate. But one thing is to taken care of that banks charge fees to convert from floating to fixed and vice versa. Therefore check each and every aspect before switching to other.


2. There are some banks and housing finance companies (HFC’s) which are trying certain measures to keep the interest rate burden to themselves. In prevailing conditions it would be sensible to compare the currently prevailing interest rates so that you can find the best and cheapest offer. In case you find such entity which is giving cheaper interest rate and offers balance transfers then stop there and think over for it. The main thing to watch here is the balance transfer fees, the EMI's and loan tenure. At times banks play smart by charging high fees for balance transfer and keep harsher terms.


3. Some banks offer facility of increasing your loan tenure. But certainly this will be decreasing your monthly home loan EMI burden. Banks take in consideration the age of the applicant while deciding an increase in loan tenure. Most of the banks have fixed the upper age limit up to 60 years for salaried and 65 years for self-employed. So if you are not nearing retirement and have a good employment track record then you are lucky.


4. To ease the tension and decrease the EMI burden the best option is to prepay a part of your home loan. Banks have prepayment option which is subject to their terms. If you have a fixed deposit, or any other asset which you think can be used to bring down your total home loan amount, then use it rather taking another loan. Some people make mistake by taking another loan or overdraft on their existing deposits and use that money to pre-pay a part of home loan, but it is only another loan.


5. To manage your expenses budget is the most important tool. Though, most of us rarely use it. If you have to pay back your loan then keep track of your everyday spending so that you can spare some valuable cash. This small-small saving will be useful and a handy resource to fund those hike in EMI’s or at least a part of it.

Home loan rates will continue to rise or fall but your intelligent thinking to tackle the situation will save your from all that harassment and tension.

Allahabad bank to offer insurance facility on housing loans

Kolkata-based Allahabad Bank is providing mortgage term loan facilities to his housing loan customers by signing an agreement with Tata AIG Life. Bank has also tied up with Life Insurance Corporation of India (LIC) for providing similar insurance on housing loans.

J P Dua, executive director of Allahabad Bank informed in the future bank has plans to get into similar tie-up arrangements with insurance companies for providing insurance on education and automobile loans.

He stated bank is planning to tie-up with Kotak Mahindra Insurance for education loan. He said around 31 per cent of home loan borrowers have already chosen for insurance cover.

Joydeep Roy, chief distribution officer, Tata AIG, said, "Customers would be offered reducing term life insurance designed to cover mortgage loan obligation of the insured member against death during the term of the coverage."

According to the agreement, the bank would be extending Tata AIG's housing loan cover through its network of 2,154 branches across the country.

According to bank sources bank will be opening 115 more branches by December 2008. Bank has submitted its application for the approval with the Reserve Bank of India (RBI).

Dua informed Allahabad Bank has the capacity to raise up to Rs 2,000 crore this fiscal. The bank would be concentrating on retail banking for which it would be opening six retail malls for marketing retail products.

Last year, the bank had raised Rs 10 crore from non-interest income of Rs 10 crore and aims to double it this year. Bank sources said insurance cover will be optional for borrowers, and this facility will be extended to new as well as existing customers of the bank.

Dua said the mortgage insurance would help customers in the time of need. In case of an unfortunate event like death of the mortgage loan borrower Tata AIG will provide for repayment of the housing loan and the family would get back the property.

The family would get back the property.

ICICI Bank lowers EMIs for home loan on customer feedback

ICICI Bank, is India's second biggest bank, and was among the first players to cash in on the retail loan boom and accounts for nearly one-third of the market, has announced to lower the equated monthly installments (EMIs) for a large number of its borrowers by raising the tenure of their home loans.

Bank has sent letter to borrowers explaining that the step taken is a "customer-friendly gesture" in response to customer feedback.

Earlier the bank had raised the benchmark reference rate or the prime lending rate for floating rate borrowers in February and March 2007, following which many borrowers are paying higher EMIs.

In the letter it was stated, "Subsequently, we have received a lot of feedback from customers that they would prefer to increase the tenure rather than increasing the EMI."

The offer was open from April.

Verifying this, a senior bank executive said, "Borrowers with a good track record have been given the option based on the feedback received from some of them. Borrowers also have the option to pay the EMI that they have been paying and not opt for a longer tenure."

The bank offer has come at the time when most of the sectors like information technology and even financial services are seeing lower increments this year.

Meanwhile the bank, has expressed its move as routine and the executive said, "There are many sectors that are doing better. The Sixth Pay Commission recommendations may be implemented this year. The economy is stable. What you are seeing is some precautionary check on spending. But we have not seen any impact as people were paying the higher EMI. For everyone, a home loan is top priority when it comes to repayments."

Although this year, most of the banks had reduced interest rates on indication from the government, but ICICI Bank did not cut rates.

Due to which the interest differential between an ICICI Bank mortgage and a home loan offered by a public sector had increased forcing some borrowers to shift to players that charged lower interest.

The ICICI Bank executive clarified that the move is not aimed at reducing the EMI differential.

The executive explained, "During a period of 18 months, the interest cost went up 350 basis points and what you saw in February-March this year was a 25-50 basis point reduction. That does not affect a borrower since they have to pay a prepayment charge to go to a new lender".

Find the best interest rates on home loans

Today investing in real estate is considered as lucrative and sensible. Most of the home owner’s especially young salaried employees have built or purchased their homes with borrowed money. It is not difficult to get a HFC or bank sanction home loan but the most important issue is how to decide which bank is offering the best home loan rate?

Through internet it has become easy to find information about anything but virtually it is not possible to visit websites of every individual bank as there are over 100 banks and non- banking institutions.

Besides this most of the sites do not give extensive information and also do not regularly update the data. While surfing net I came across rupeetimes.com. On this site I got all the information related to home loan rates. I could even compare the rates offered by all major banks in India.

This site enables you to compare rates offered by different banks, and then you can choose from fixed and floating rates and compare them. You can choose the tenure and know the rate according to it.

For instance I wanted to take the loan for the tenure of 1-5 years. On the site I selected the tenure and the bank name ICICI bank and selected the option fixed rate. I got the complete information about the rate, eligibility, min. loan and the max. loan the bank gives. Along with ICICI bank I could see the information of other banks also. Like this it became easy for me to choose the right bank to apply for home loan.

On this site apart from home loan there is a tool to compare rates for credit cards, home loan, auto loan, personal loan, fixed deposit, and educational loans.

Charges related to home loan

Home loan have charges attached to it about which some of us do not have a clear idea. Here we have tried to explain about those charges so that you have clear picture about them and know exactly what do they mean?

EMI in some cases is charged from the month of final payment of loan. Some banks calculate it from the month following that. The borrower should decide about EMI depending on his cash flow position. The time period from which the EMI will be charged has an impact on the total interest cost to be paid by the borrower over the loan tenure.

There are two types of rate – floating and fixed.

Floating interest rate: - An interest rate, this move up and down with the rest of the market or along with an index. This contrasts with a fixed interest rate, in which the interest rate of a debt obligation stays constant for the duration of the agreement.

A floating interest rate can also be referred to as a variable interest rate because it can vary over the duration of the debt obligation.

Fixed interest rate: - A loan or mortgage interest rate that will remain at a predetermined rate for the entire term of the loan.

When you take home loan the repayment time period, EMI and the interest rate, all these are finalized. In case of interest rate you can choose from the two types of rates fixed or floating. Later on there can be chances that you might want to switch over from a floating rate to fixed rate (because the interest rates are likely to go up) or vive versa (in case the interest rates are expected to come down) then the bank charges penalty amount from the borrower.

The bank fixes the time period for the repayment of the loan and the borrower has to complete the installments with in that period. In case the borrower income increases and plans to pay the balance installments of the loan before the time period then some banks charge prepayment penalty in case the loan is repaid before the full term or certain agreed minimum period. This is done because it disturbs the cash flow and income estimates of the bank.

The amount can vary from 1-5 percent of the outstanding amount of loan. Some banks waive off these charges under some conditions. The charges are payable on the balance amount outstanding and not on the total amount of loan sanctioned.

If you are punctual in repaying the installments i.e. paying all installments on time then some banks as an incentive can waive off of last one or two installments.

Home loan borrowers to pay higher down payment on loans

Banks are increasing their financing margins. Financing margin is the percentage of property value that a borrower has to pay. Now the home loan borrowers have to make a higher down payment on loans.

Punjab National Bank, Union Bank of India and Indian Bank has already increased their financing margins.

Now Punjab National Bank is financing up to 75 per cent of the cost of construction or the purchase value of a property as compared to 85 per cent earlier.

Earlier Union Bank was financing 85 per cent of the property cost now the bank will finance 80 per cent which means increase in its margin requirement for home loans to 20 per cent from 15 per cent.

While Indian Bank will be financing up to 80 per cent for all fresh sanctions of housing loans of above Rs 20 lakh from April this year.

S. Govindan, deputy-general manager of Union Bank said, “Our cost of capital has increased substantially in the past couple of years. We have to increase the margin requirement because then we can offer home loans below Rs 20 lakh at less than 10 per cent interest rate”.

However the increased margin requirement by banks has been, balanced by lower lending rates of between 9 per cent and 9.75 per cent for home loans of less than Rs 20 lakh for up to 20 years.

In fact Banks who are still financing up to 85 per cent are charging a higher interest rate of between 10 per cent and 11.25 per cent for loans below Rs 20 lakh. Though, customers can bargain for lower interest rates if they opt for greater down payments.

The SBI is giving a 0.15 per cent discount on the interest rate to the borrowers who are paying 25 per cent, instead of 15 per cent, of the purchase price of the property. Or else the bank charges between 10 per cent and 10.50 per cent floating interest rate for loans below Rs 20 lakh.

“Banks are already charging 25 to 75 basis points (100 basis points is equal to one percentage point) more for loans above Rs 20 lakh and the minimum margin requirement is also higher at 25 per cent for these loans. For loans of less than Rs 20 lakh, borrowers should be ready to pay more upfront to get a lower interest rate,” said a public sector bank official.

DSA: “Banks are becoming stricter on sanctioning home loans”

Now day’s banks are becoming stricter on sanctioning of home loans. Direct selling agents (DSAs) of banks said that almost all banks are becoming stricter on sanctioning home loans. “We have been specifically asked by banks to reduce the loan amount,” said the head of a DSA.

Recently there has been an instance where Irene D’Souza’s (name changed) broker had got her a home loan of Rs 18 lakh approved from ICICI Bank. However, when she went for the cheque, she was told that only Rs 9.53 lakh would be disbursed. Now she has approached another bank, in spite of her producing all the supporting documents of income bank told her that it will sanction Rs 16 lakh, but the broker has to stand as a guarantor.

D’Souza's is not an isolated case. Banks are using various methods to do it. One such method is reducing the loan-to-value (LTV) ratio in an indirect manner. That is, if the house costs Rs 20 lakh, normally the bank provides 80 to 85 per cent of the cost of the house, which would be to the tune of Rs 18 lakh.

Most of the banks are now valuing the house much lower so that though the loan-to-value stays same, the amount disbursed is lower.

For instance, if the same home is valued at say, Rs 15 lakh, the bank disburses around Rs 12 lakh. Effectively it means that the bank has disbursed only 60 per cent, instead of the 80 per cent.

Rajeev Sabharwal, head, retail sales, ICICI Bank said, “We have not changed any policies on the LTV to give us any extra cushion, but sometimes the valuation of a property genuinely goes down.”

According to him, bank officers go and check the prices of the area before sanctioning the loan. As per the sources the legal and technical teams that visit the site before the loan sanction are instructed to be stricter.

Indeed, some banks have even started using the “Ready Reckoner” issued by the government that gives the price of a certain area, based on the stamp duty paid by property buyers in that area.

KVS Manian group head, retail liabilities, Kotak Mahindra Bank said, “All banks are bringing down their exposure in overheated areas. Earlier, banks were willing to aggressively finance even up to 95 per cent, now it is down to 75-80 per cent.”

Apart from the above one there are some other measures as well that banks are following severely. For instance, if there is a cash down payment through a personal loan from a relative, they are insisting on the bank statements of the relative.

“Sometimes, buyers take personal loans to fund the initial down payment, thereby making it difficult for him to service all kinds of loans,” added Manian.

Also, they are belligerent going through the financial details of the customers. There is a clear indication that for potential home loan borrowers buying their dream house is going to be tough.

Inflation can cause rise in home loan rates

Inflation has begun to bite; a 12-month high of 6.7 per cent can be seen making it costly for banks to raise funds. Therefore this burden will have to be passed on to the borrowers through higher interest charged on their loans.

In view of increase in inflation IDBI Bank has withdrawn the 0.5 per cent cut in rates of home loans and other debt it had announced on Wednesday. According to industry experts more banks are likely to follow suit.

Besides from IDBI, HDFC, State Bank of India, Canara Bank, Bank of Baroda, Bank of India, Allahabad Bank and Union Bank of India had cut loan rates since February 1.

Banking sources, requested for secrecy, confirmed that they are seriously thinking of raising loan rates but are waiting to see which way inflation will head now.

Confirming inflation is the cause, IDBI’s chief financial officer R.K. Bansal told Hindustan Times: “Our decision is in line with market trends. We may reconsider after 10 days.”

A rise in interest rates is expected after benchmark security profit rose by 0.13 per cent to 7.91 per cent in the government securities market.

M.S. Sundara Rajan, chief of Indian Bank, said: “It’s too early to predict upward movement in interest rates...” A senior banker added, “We can wait till the Credit Policy next month to decide.”

UCO bank signal for reducing interest rate on home loans

On Friday state-owned bank UCO bank announced that it might cut home loan rates by 50 basis points. The final decision will be taken in the board meeting scheduled to be held on March 15.

Yet it has not been clarified whether lower rates will be offered for home loans under Rs 20 lakh. Though, the government had said that it is in favor of lower interest rates for home loans under Rs 20 lakh to meet demand. These loans comprise 80% of the advances classified under priority sector.

“We have already cut down home loan rates by 50 basis points and may further cut down the rates by another 50 basis points,” UCO bank chairman and managing director S K Goel said.

On being asked about raising capital, Mr Goel said the bank would take a view only when market stabilizes. He said in case markets do not stabilize till June, the bank would raise about Rs 250 crore through qualified institutional placement.

Smaller loans have less risk weight than those above Rs 20 lakh and, therefore, bankers have reason to lend to these borrowers at lower interest rates.

Already several banks, including SBI, Canara Bank, Allahabad Bank and HDFC, have reduced lending rates by 25-50 basis points. While The largest private bank, ICICI Bank, has said there could be softening of rates in the first quarter of the next fiscal.

SBI have fixed charges 10%-11.5% for loans up to Rs 20 lakh. Mr Chidambaram’s has recently called for softer interest rates which could mean further lowering of interest rates in the home loan segment.

FM acknowledges need to lower interest rates on home loans

Finance Minister having an eye on the coming state and general elections acknowledged the need to lower interest rates on home loans less than Rs 20 lakh. However he left it to the Reserve Bank of India and the bankers to take a call on it. “It is in the interest of the public to lower the interest rates on home loans up to Rs 20 lakh,” Mr Chidambaram said in his post-Budget interaction with industry heads, organized by Assocham. He added he will continue to argue for lowering rates on home loans up to Rs 20 lakh as they account for a major portion of the market. It will tackle the problems of the middle class and low income group housing.

At present 80 per cent of the borrowers take loans less than Rs 20 lakh, the finance minister said these loans had less risk weight than loans over Rs 20 lakh. Therefore, he said, bankers have the reason to lend to these borrowers at lower interest rates. “I made a number of efforts to impress upon bankers in this regard... It is a constant effort that I will have to make... Bankers will have to take a call, RBI will have to take a call,” he added.

In January, and again last month, the finance minister had managed to successfully convince public sector bankers to pare deposit and lending rates, a move that has already seen home loan rates dipping. Earlier this week, he made another ground, though bankers had said it might be difficult to implement the finance minister's advice immediately.

RBI on its part has already assigned lower risk weight to home loans up to Rs 20 lakh, making possible for banks to offer smaller loans at lower rates. But in practice, it is just the reverse. Interest rates on big-ticket home loans of over Rs 1 crore are around half a percentage point lower than rates offered for loans up to Rs 50 lakh. And those between Rs 50 lakh and Rs 1 crore cost 25 basis points less than loans up to Rs 50 lakh. Bankers attribute this mainly to lower cost of servicing and overheads.

Go for en cashing home equity than personal loan

If you are planning of expanding your business then you can go for your encashing home equity.

For instance when Nishant Sheth, a textile entrepreneur, was considering of borrowing funds to expand his business; the first option that came to his mind was applying for a personal loan. But he thought over this and had almost approached a bank, when his father asked him to reconsider.

His father suggested mortgaging the house where Nishant lived; pointing out that a loan against property would work out to be cheaper than a personal loan. Nishant saw merit in his father’s words and decided to approach the bank for a loan against his property.

Knowing the benefits mortgaging the house like Nishant, many entrepreneurs are thinking of this option as returns on business are higher than the cost of a loan against property (also called home equity loans).

Explains My Financial Advisor director Amar Pandit: “Real estate prices have shot up and business owners are looking at en cashing a part of their home equity to fund a portion of their growth. This trend has emerged because of higher home prices, need for low cost funds, and to fund investment activity.”

More and more of the small entrepreneurs who have limited access to other means for credit are considering for this. Taking the cue, banks have started promoting their loan against property portfolio. Says Vivek Vig, country head, retail bank, Centurion Bank of Punjab: “It was a hidden asset. People are realizing that it can be leveraged to boost their business.”

The loan is sanctioned after valuation of the property, establishing the ownership and assessing the repayment capability. It is also subject to the minimum market value of the property specified by the bank. Typically, the loan amount could work out to 50-60% of the property’s market value (as determined by the bank).

Though the loan can be used for any purpose, but some banks encourage the borrowers to disclose the end-use. Speculative businesses are looked down upon. The repayment of the loans can be done in equated monthly installments (EMIs) and the repayment period could range from two years to 15 years.

The plus point of taking home equity loan is the lower rate of interest. “Loans against property are 30-40% cheaper than personal loans,” informs Mr Pandit. Rates on such loans are in the range of 12-15% pa. The banks offer lower rate of interest due to the presence of a security in the form of the borrower’s house, whereas personal loans do not involve any such collateral. Moreover loans against property are given for a longer tenure, while personal loans are for shorter tenures. Also, personal loans have a tenure limit and banks cannot sanction personal loans beyond that.

“The bank will not give you a personal loan of Rs 1 crore, but you can get this kind of money if your house is around Rs 1.75-2 crore,” adds Mr Pandit. “A loan against property involves no hassles and the bank’s interference is minimal,” says Mr Vig.

A borrower must check for prepayment penalties. “Most of these loans can be prepaid in part or full without any charges or subject to certain charges. This may vary and the borrowers should check this. Also, before opting for such a loan, it is advisable to check if there are alternative sources of borrowing like loans from family, loans against fixed deposits etc,” advises Mr Pandit.

Taking home loan for your dream house, Take care of your property documents

Every body has a dream to have their own house and to fulfill this dream we take a loan from the bank. But there is a need to take care of the property papers after taking home loan from the bank.

Recently there has been a case where the lender bank misplaced the property papers of one of their customer.

Sudhir Bawa had taken a home loan from a multinational bank and repaid it, but when he wanted the original sale deed papers back from the bank he was told that his property papers were lost.

Bawa, consultant with an international pharmaceutical company, told IANS, "I had taken Rs 9,00,000 as home loan from HSBC Bank in Connaught Place in 2000. By 2002 I had repaid the loan. But the bank apprised me that the original sale deed papers were lost ".

The bank shrugs off the matter from their shoulders by lodging an FIR at the Connaught Place police station.

Bawa added, "They informed me by a letter and then merely registered an FIR. However, they refused to compensate me for the loss caused by the bank's carelessness. If the documents get into the wrong hands they can easily be misused.”

Ultimately Bawa sell off his property at a lower price, bearing a loss of over Rs 10 lakh as he did not have the original papers of his property.

"This is sheer negligence on the part of the bank and they are liable to compensate the loan applicant," said lawyer Manjeet Singh Ahluwalia.

Lawyers handling consumer matters also agree that though such cases are not the average cases, banks are unwilling to pay compensation to the aggrieved.

"Banks are generally not inclined to compensate the loan applicant, leaving him with no recourse but to move court. This unnecessarily adds to the backlog of cases," said Sugriv Dubey, a lawyer.

Though last year, the State Consumer Commission had slapped a fine of Rs 500,000 on Citibank for misplacing the original documents of the property of Prem Narain Gupta.

Gupta, a resident of east Delhi, had taken a loan of about Rs 7,00,000 for renovation of his property valued about Rs 1.5 crore in 2001.

"Once a service provider resorts to such a procedure that a loan applicant has to deposit the original deed and not the certified copies of the title deed, he has to exercise utmost care and caution in the safe preservation of documents," the commission had said in its order.

Cut in PLR by banks unlikely to encourage house seekers

Recently both state-owned and private sector banks reduced their PLR by Rs 0.50 per cent from 0.25 per cent. This resulted in a reduction in interest rates of lending, including home loans.

But the jubilation over banks cutting prime lending rates (PLR) may not spread out to the realty market as bankers and realty firms say they are unlikely to encourage house seekers.

According to Axis Bank's (formerly known as UTI Bank) Senior Vice-President Sujan Sinha the cut in PLR is not going to affect the property prices in India.

"Axis and most other banks cover borrowers with minimum net income of Rs 7,500. But then, comparing the sky-high property prices, especially in metros, it is like a drop in the ocean, which hardly makes any ripple or difference to middle-class consumers," Sinha said.

Expressing similar views, major Mumbai realty firm Nahar Group's senior vice-chairperson Manju Yagnik said: "In order to bring a visible and ostensible change in the real estate prices, the banks will have to slash interest rates further."

She added, "With home loans dipping, we are adopting a wait-and-watch policy especially with the budget just round the corner. There will be no immediate effect on the property prices".

"No doubt there will be a small correction in the real estate prices but then this will be more due to the falling market and economic slow down," Yagnik pointed out.

According to the Managing Director of real estate firm Marathon Group, Mayur Shah, the downward revision of PLR was "in no way going to affect the real estate prices".

He said, "It all depends on the cost of land and cost of construction”.

Shah specified that the positive impact of the rate cut can be seen on the consumers who were earlier shying away from taking loans, fearing the hike in interest rates of home loans to continue.

Union Bank of India slashed interest rates across the board last week, the chairman of the bank M V Nair, said, "We have acted on the general feeling that interest rate should come down."

"We are convinced that this was the appropriate time as the depository and lending rates needed some correction," he said, adding that he was hopeful that the rate cuts "would certainly benefit and attract the middle class".

Meanwhile it seems some other leading private banks do not appear to be in any mood to bring down their PLRs, at least not till the budget.

FM asks banks to focus on home owners, consumers

After the Reserve Bank of India's (RBI) moral suasion to public sector banks on cutting interest rates, the Finance Minister P. Chidambaram insisted the public sector banks to cater to the requirement of credit to home owners and buyers of consumer goods.

In his meeting with the chiefs of the public sector banks finance minister asked state-run banks to ensure that productive sectors of the economy are not starved of credit.

After a meeting with the Chief Executives of Public Sector Banks in Delhi the Finance minister told the reporters that productive sectors have not been starved of credit and banks have fulfilled their mandate in this area. He said, over the next few days, banks will pay attention to the credit growth and delivery. He also asked the banks to implement sugar package in the next 10 days and submit reports.

Meanwhile, amidst ongoing rate cuts, bankers on Tuesday said they expect a further fall in interest rates due to ample liquidity in the banking system.

Some banks have already reduced interest rates. State Bank of India (SBI), India's biggest commercial bank by assets, reduced its benchmark prime lending rate by 25 basis points to 12.5%.

Private sector housing finance major HDFC and public sector banks such as Canara Bank and Allahabad Bank have also cut rates on retail and consumer loans. Last month Chidambaram had asked banks to lower rates to revive slowing loan growth.

"With ample liquidity in the banking system, pressure on rates has eased," said M. B. N. Rao, Chairman of Canara Bank. With the revision in prime lending rate (PLR), the interest rates on home and car loans, in addition to loans for small and medium enterprises and consumer goods, will also fall.

Speaking to reporters in New Delhi today Rao said that the banking industry is facing a peculiar situation - high growth in deposit rates and decline in credit growth. On a Year on Year basis, deposits grew by 29.5% till Jan. 25 as against 23.5% last year. At the same, advances grew by 22.6% compared to 29.8%.

Liberalize the real estate, make houses affordable

The government’s principle is to provide roti, kapda aur makaan for all, then housing has to be made affordable everyone, especially in urban dwelling.

After liberalization in the aviation and telecom sectors, the common man of India has been able to use these facilities. In the same manner it has become necessary that real estate should also be liberalized.

Right from local government and up to the central government, real estate sector is taxed at every level so it has become the highest taxed sectors in the country. Taxes can build up to 45 per cent of the project cost. Therefore there is a need that government should rationalization of the taxes for the sector.

To start with, the finance minister should make the entire interest and EMI (equated monthly installment) payment of the first house completely non-taxable. This would bring down the burden of the buyers.

Moreover we appear to be moving towards an interest rate regime which is different from the international one. Over the last two years, as the interest rates have gone up there has been increase in the borrowing costs, by over 70 per cent. Therefore, there is a need to bring the interest rates down as is the global trend and this will make possible houses more affordable and also ease our borrowing costs.

Tax exemption on IT (information technology) parks should continue. If SEZs (special economic zones) are getting special tax exemptions, then same should be extended to IT parks as well.

Not all IT companies are capable of setting up of shops in SEZs, and, hence, should get the same exemptions by operating out of IT parks.

It’s important for the government to focus on mass affordable housing. Thus this segment must get some tax exemptions. If the finance minister plans out a special tax incentive for mass affordable housing projects, then the rates can be easily brought down by 15-20 per cent which will make houses more affordable for the common man.

In his last budget, the finance minister had brought leasing of commercial properties under the service tax umbrella. We have been opposing this move as leasing activities cannot be a service.

Over the last few years there has been increase in the input prices, so we are not demanding any special schemes or incentives to reign in input prices. We believe in free market economy and are willing to pay market prices of commodities we buy.

In fact what the government can do is to ensure that products are available when needed, like it brought down the import duty for cement; it can bring down the import duty for steel, which will make it cheaper.

On FDI (foreign direct investment), we need the government to consider, at least for the listed real estate companies, that such investments be treated as portfolio investment.

Banks issued notice for seeking details of interest rates increases on home loans

Last month a notice have been sent to about half a dozen banks by the Monopolies and Restrictive Trade Practices Commission (MRTPC) seeking details on how they had determined the interest rate increases on their housing loans.

This reflects the concern expressed by the Reserve Bank of India (RBI) in its mid-term policy review in October 2007 on transparency and fairness in the pricing of housing loans.

In 2007-08, most banks had lowered the lending rates but only for the new housing loan borrowers, because revising the interest rates for existing customers require banks to first revise their benchmark prime lending rates (PLRs) to which the housing loan interest rates are linked.

However, some public sector banks have now lowered the interest rates for both existing and new borrowers. But they have still kept the benchmark PLR unchanged, reflecting the increasing irrelevance of the PLR as a benchmark rate.

Whereas the PLR was supposed to be the rate at which a bank would lend to its best borrowers; banks’ prime borrowers are now availing loans at interest rates that are 25% lower than the PLR.

In spite of fall in the deposit rates and lowering cost of funds since April 2007, banks did not change their PLRs.

In its report on the trend and progress of banking in India for 2006-07, the RBI, had observed that the share of lending at rates below the PLR (sub-PLR lending) had gone up by 79% at the end of March 2007 from 69% a year earlier.

In 2001, the RBI allowed lending at rates below PLRs so it is no longer essential to revise the PLR to reduce effective loan rates. In April 2003, the RBI proposed a single benchmark PLR to address the downward stickiness in lending rates.

While the general practice of having multiple prime lending rates for working capital and term loans had made the pricing of loans complex.

Banks are supposed to take the approval of their boards in fixing their BPLR, based on cost of funds, operating expenses and a minimum margin to meet the regulatory and provisioning norms and a profit margin.

While the lending rates did come down initially, reflecting the overall decline in interest rates over the last three years, the BPLRs, quick to rise, have shown reluctance in climbing down.

In case of floating rate loans, banks had the option to either link the interest rates to BPLRs or market the benchmark rate.

In its mid-term review for 2005, RBI had called for a review of the BPLR system noting that competition had forced the pricing of a significant proportion of bank loans far out of alignment with BPLRs and in a non-transparent manner.

It was supposed that loans to companies were being under-priced, while small-scale industries and agriculture were being over-charged. So RBI asked banks to analyze the costs incurred for lending to various segments.

Since then, the RBI had repeatedly expressed its concerns, accompanied with threats of regulatory action if banks did not ensure transparency and fairness in the pricing of loans.

In their pre-monetary policy meeting with the RBI in January 2008, banks did convey the absence of a market-determined benchmark rate to price floating rate loans.

“We told the RBI about our need for a true market indicator for the benchmark rates to develop floating rate products,” said a banker present at the meeting.

Bankers have marked the need for a market-determined benchmark rate. Banks are only asking for flexibility in determining the interest rates on the lending side, as well as on the deposits.

Banks have not been able to find the takers for the floating rate deposits since fixed deposits are a preferred option. Banks are assessing the feasibility of having different interest rate deposit products.

A customer who wants the option of withdrawing the deposit before maturity should be offered a particular interest rate and; a borrower who forgoes the option might be given a higher interest rate.

The retail committee of banks under the guidance of the Indian Banks’ Association is studying the issue. Meeting is likely to be held this month to discuss the establishment of benchmarks for floating interest rates.

Banks cannot argue that they are exposed to a similar interest rate risk on the deposit and lending side. While banks provide housing loans with an average maturity of 10-15 years, the deposits are of 1-3 year maturity and are automatically re-priced when they come up for maturity.

A working group has been formed by RBI to study the development of an inter-bank term money market in India. The inter-bank term money market, where banks can borrow funds from each other for 15 days to one year, is very low as the daily volumes are currently just a few hundred crore rupees.

Home loan rates expected to fall before budget

There can be fall in the Home loan interest rates in the weeks leading to the budget.

Last week HDFC reduced its interest rate by 25 basis points, following on the same lines ICICI Bank and other public sector banks are also planning of reducing their interest rates by 25 to 50 basis points. According to ICICI bank sources cut in the interest rate is expected in a couple of weeks.

“We are evaluating the interest rate scenario and likely to take a final decision shortly,” a source in the bank said. “Given the global trend, there is case of softening of the interest rate. However, much depends upon the inflation, which is still at around 4 per cent with upward bias.”

Though, bankers have doubts about that the reduction in the interest rate may increase the home loan demand.

Since January 2006, there has been an increase by 4 percent in the interest rate and the equated monthly installment (EMI) has increased by Rs 250 per lakh for 20-year loan. A reduction of 50 basis points will definitely have an effect on EMI and would reduce by around Rs 34 for a 20-year loan.

Bankers said the current decline in the home loan disbursement is primarily because of the sharp rise in real estate prices, as many borrowers are finding it difficult to divide out such huge EMIs.

Union Bank of India Chairman MV Nair said there has been reduction on deposit rates and lending rates.

The Bank of Maharashtra is thinking of reducing lending rates in some segments next week. “We might effect an interest rate cut in the range of 0.25-0.50 per cent,” said bank chairman MD Mallya.

Analysts expect cut in loan rates

Home loan rates are heading towards south. On Tuesday the Reserve Bank of India’s (RBI’s) credit policy and it is expected to cut the rates at which it lends money to banks, which in turn will pass on the benefit to those who have taken home or personal loans from them.
Analysts are of view the banks will be cutting loan rates even if the RBI does not cut its rates immediately but simply hints at it in the near future.

While industry watchers expect the RBI to take a cue from the US Federal Reserve, which had cut rates by 0.75 per cent to keep at bay the slump. They are expecting the RBI to shave 0.25 per cent off its rates. “The RBI is also expected to keep steady the cash reserve ratio — the percentage of deposits banks are expected to keep in reserve — at 7.5 per cent,” said A. Prasanna of ICICI Securities.

At the moment banks are flushing with cash, which is another reason why analysts are certain about the fall on loan rates. According to RBI data so far this fiscal credit growth was at 22.2 per cent, compared to 31.9 per cent last year, while deposit growth rose to 23 per cent from 21.5 per cent.

Sachchidanand Shukla, economist at Enam Securities, said: “The other indicator is that leading lenders like ICICI and HDFC have extended their Diwali offers on loans up to January-end. They could not cut them earlier because of the fear of a cash reserve ratio hike.”

So, what can stop the RBI from cutting rates? Mainly, it is the fear that it can be interpreted as a departure from the discipline of a tight monetary policy over the last four years, which has served the economy well.

“So, even if the RBI does not cut rates right away, the trend points to cuts soon enough,” said D.K. Joshi, director and principal economist at industry rating agency CRISIL.

Home, auto loan rate to cut down with cut in interest rate

Alarming state of the US economic slowdown on Tuesday forced a cut of 0.75 in the interest rate, there is growing conjecture that the Reserve Bank of India (RBI) will also follow the same line.

If that happens, over the next two quarters one can see a cut in retail loan rates, including home loans, by 0.25-0.5 per cent. Floating rate home loans of the three major lenders HDFC, SBI and ICICI Bank are between 10.25 per cent and 10.5 per cent.

On Tuesday RBI is scheduled to announce its quarterly monetary policy. It would be under pressure as the Federal Reserve (the Fed) rate cut has broadened the differential between US and Indian rates to 4.25 per cent. (The Indian repo rate, the rate at which the RBI lends to banks, is 7.75 per cent, while the US Fed’s overnight rate is 3.5 per cent).

On seeing this kind of differential, it will make sense for foreign players to borrow in the US and lend in India to make money on the spread. The RBI would not want that, for the arrival of an overflow of dollars would make the rupee stronger, reducing our ability to export.

If the RBI cuts rates, then the retail rates will get cheaper. On January 4, finance minister Palaniappan Chidambaram had asked banks to lower lending rates by 50 basis points (100 basis points make 1 per cent). Although bankers feel there is scope for retail loans to move southwards.

“Home loans are expected to come down this year by at least 0.5 per cent as we expect the central bank to slash key interest rates by 0.25 per cent during the monetary policy review,” said Harpreet Singh, business director for wealth management and distribution of loans with Centurion Bank of Punjab (CBoP).

OP Bhatt, managing director of State Bank of India, said rates could be cut, but did not want to commit himself to a specific rate. “To cut rates would be the intention, but there is no one-to-one correlation between RBI rate cuts and consumer rates. I can’t say how much rates will come down,” Bhatt said, speaking on the sidelines of a conference in Mumbai.

Unlike CBoP, Bhatt feelt that the RBI will hold its benchmark interest rates stable during the monetary policy. “It may not go up. It may remain the same. A rate cut in the US does not necessarily mean rates should be cut in India. Factors are different,” said Bhatt.

In the past 18 months the central bank has raised key interest rates six times. Since December, 2006 it has also raised banks’ cash reserve ratio (CRR) by 2.5 per cent to 7.5 per cent in order to suck out excess liquidity from the system and keep inflation within limits.

Rajiv Sabharwal, head of retail assets and rural finance at ICICI Bank, felt that there would not be any change in interest rates on retail loans as a whole during the current quarter, but a lot would depend on what the central bank would do.

“While we do not see a change in interest rates on loans for this quarter, it all depends on the regulator and the cost of funds,” Sabharwal added.

Discussing about auto loan rates specifically, CBoP’s Singh feels they will slide by good 50-100 basis points this year.

“While demand for car loans has been satisfactory, demand for two-wheeler loans is almost nil owing to high interest rates. If there is a decline in interest rates, we could expect some softening in auto loan rates this year. This will help a pick up in demand,” said Singh.

Farmers alleged Parmatma Cooperative bank for cheating and harassment

Farmers come together to fight against cheating and harassment. In Nagpur bench of Bombay high court, 66 farmers from Ramtek and Mouda together have filed a petition against Parmatma Cooperative Bank for alleged cheating and harassment.

The single-judge bench of Justice Bhushan Dharmadhikari, directed registrar to verify charges regarding excess recovery of loan from the petitioners, and issued a show cause notices to principal secretary of state cooperatives department and Parmatma Cooperative Bank chief executive officer. The notices have also been served to bank’s managers of Ramtek and Mouda branches and regional director of Reserve Bank of India.

According to the petitioners, they had secured loans for the purpose of farming and house repairs from the bank. They alleged as most of them are illiterate the bank has cheated them by recovering excess amount.

One of the petitioners in his petition said that he had applied for Rs 30,000 loan in 1999, however the bank gave him only Rs 22,500. In July, 2007, the bank told him to pay Rs 80,518 in form of repayment. Other farmers also claimed that they have become the victim’s to the bank’s illegal practice in the same way.

The petitioners said that despite appealing before various offices including state cooperative department and police, their appeals were ignored. They have asked for high level probe into the matter and action against the guilty.

Rise in home loan rates slowdown in housing loan disbursal

In the current fiscal year downfall in housing sector is expected between 17 and 20 per cent. There has been rise in the home loan rates which had a sever impact on the housing sector, its growth has fallen to 26.6 per cent in 2006-07 from 29.1 per cent in 2005-06

A study on ‘Impact of rising home loan rates’ was done by the Associated Chambers of Commerce and Industry of India (ASSOCHAM). In its study it pointed out that the real estate market has already seen a drop of 60 per cent in sales.

Its impact could further worsen if reversal in rising interest rates for housing is not addressed urgently.

Before the fiscal year 2005-06, the former three fiscals saw a record year-on-year rise in the housing sector of 49.5 per cent, 73.9 per cent and 48.6 per cent respectively. As no suitable measures have been taken to control the interest rates on housing segment have been affected, by nearly 60 per cent therefore many of home aspirants are staying away from the pre-launch sales.

“The builders usually rely on the advance amount received by way of pre-launch bookings. The money is collected well before starting construction work but loans are becoming costlier as the buyers are not willing to expose themselves to an extended time period. Instead, they wait for the completion of construction. Several developers have, therefore, deferred the launch of their residential projects,” says the study. The study conducted referring to differential between EMIs, says the approximate change in EMI for housing loan of Rs.10 lakh works out to be Rs.3,250 and puts an additional burden of Rs.39,000 per annum on end-users.

The study also points out that speculators play a significant positive and negative role in pushing the prices of property by more than 20 per cent and rise in interest rates helps speculators to dictate the prices.

According to Chamber’s findings, the recent boom in property market joined with low interest rate regime had worked as a breeding ground for speculators. So much so that speculators included a whole range of players such as small property brokers, big or small retail investors apart from big players. The speculators generally buy units in bulk by paying margin money thus creating an artificial shortage, which increases pressure on the prices.

With the funds becoming dearer, there has been a major slowdown in speculated purchasing activities by investors for at least short term. The risk rewarded ratio of the speculators has been thrown out of gear. For the time being the risk has magnified as the buyers are adopting a “wait and watch policy”, with the expectations of correction doing rounds, concludes the Chamber’s assessment. In the last couple of years the real estate sector market size currently estimated at $15 billion which has grown between 35 and 38 per cent in the last couple of years as a result of which huge investments have poured into it.

It is expected that 2008 onwards, the real estate sector is likely to grow between 40-45 per cent, but by 2010 metros and large cities will see a slow pace. The study stated as a result of this, the reality sector in tier II and tier III and even tier IV cities will make major expansion drive for providing housing units to the neglected lot of society.

Strong quarterly profits set to be posted by Indian banks

Analysts are a view that Indian banks are expected to show a healthy rise in their quarterly net profit on higher earnings from loans due to a rise in interest rates and treasury gains as a result of a gain in bond prices.

For Oct-Dec a Reuters poll of analysts forecasted an average net profit rise of 23 percent for small and mid-cap banks. Private sector banks have been posting the highest rise.

"With the lending rates mostly remaining firm, the yields on advances should provide some fillip to the net interest margins on a sequential basis,'' Brokerage Sharekhan said in a report.

In 2007 banks raised interest rates by 200-250 basis points, after the Reserve Bank of India had raised the rates five times since June 2006 and tightened banks' reserve requirements through the year, limiting the availability of the funds for loans.

According to the poll forecast there is a rise of 82.6 percent in net profit for the quarter for Yes Bank and 60.07 percent rise for Centurion Bank of Punjab.

There was a fall in profit in some state-run banks. Allahabad Bank, which was expected to announce results on Wednesday, reported a 9.8 percent fall in profit, whereas there was a downfall in the profits of UCO Bank and Syndicate Bank also.

In early September the rules for foreign borrowings were tightened. The Indian banks are expecting to gain from this, as this will force firms to borrow from local lenders, but banks also feared about growing defaults after the central bank raised interest rates.

Analysts said in this quarter, they will be keeping a close watch on the provisioning by banks towards bad assets as it would determine the asset quality of banks.

"If the provisioning keeps going up, then there will be a concern on the quality of assets, especially the excess capacity that was created over the last few quarters," an analyst with a foreign brokerage said.

Analysts said the cost of funds diversified between 5 and 8 percent depending on the profile of deposits. They said the cost for banks with higher share of retail deposits will be lower.

According to analysts the non-interest income, i.e. mainly gains from treasury operations, is expected to go up as bond and equity markets have performed well in the quarter.

During the quarter there was a fall in 10-year bond yield from 7.90 to 7.79 percent, while the benchmark stock index rose 17 percent to 20,286.99.

Fee-based income will also be a major factor, especially for private banks, said an analyst with a Mumbai-based brokerage.

An analyst with a domestic brokerage said the asset quality would be good and the overall economic growth will support recovery from written-off assets.