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.