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.