Banks to go chasing you, retail customers

It was a tough year for home loan borrowers, but one that has ended on an optimistic note. With the Reserve Bank of India (RBI) continuing its war on inflation and raising key policy rates several times, home loan borrowers saw their interest rates rise by 250-300 basis points (3 per cent) for floating rate customers since March 2010. More than 95 per cent of the home loans are on a floating rate basis. Rising interest rates forced many to postpone their decision of owning a house. Home loans rates were at 11.5-14 per cent on a floating rate basis in the beginning of this year. Customers who had earlier opted for teaser rate schemes of banks in 2008-09 had also got adjusted to such high rates.

But then came some relief. In April, in its annual monetary policy this year, the central bank cut the rate at which it lends to banks (repo rate) by 0.5 per cent and also abolished prepayment penalty on home loans taken on a floating interest rate. Besides, it also enhanced the borrowing limit for banks under the marginal standing facility to 2 per cent of net demand and time liabilities (NDTL) in order to provide an additional liquidity cushion to the banking system.

An increase or decrease in the repo rate impacts the interest rate on loans, mortgages and deposits. Many banks were charging 0-2 per cent of the loan outstanding as prepayment charges from home loan customers. Following the April policy, most banks (except SBI and a few more) cut their base rate by 0.25-0.5 per cent. The base rate is the benchmark rate to which all loans are linked.

Then, in its July policy, RBI reduced the statutory liquidity ratio (SLR) from 24 per cent to 23 per cent, following which, the country’s largest lender — State Bank of India (SBI) — reduced its home loan rates by 0.50-0.85 per cent and auto loans by 0.50 per cent. The reduced new rates of SBI were offered only to new customers. Then, in its second quarter review in October, RBI reduced the cash reserve ratio (CRR) by 0.25 per cent to 4.25 per cent of their net demand and time liabilities.

Finance minister P Chidambaram too in July asked state-owned banks to cut interest rates to spur growth, following which, most public sector banks reduced interest rates on home and car and personal loans and also waived processing fees on home and car loans.

With the demand for loans to companies remaining sluggish and rising bad loans, banks are focusing on growing their retail loan book, nearly half of which are home loans. From July (with the beginning of the festive season), banks have seen reducing interest rate on home loans, waiving processing fees, offering cash back and EMI waivers, and hosting property exhibitions to pep up demand for home and auto loans for the second half of 2012-13.

The year gone by saw top private sector banks launch fixed rate loans and sugar coat home loan products. Axis Bank launched ‘happy ending home loan’, a product that waives the last 12 EMIs if the customer has paid all EMIs on time. Following this, ICICI Bank launched a home loan product that offers cash back on every EMI. Many public sector banks launched combo offers where a home loan customer gets an additional 0.25-0.5 per cent interest rate reduction on an auto loan. Many banks are offering home loans at their base rate.

Says Vipul Patel, director, Home Loan Advisors, “In the past eight to nine months, home loan rates have been falling. At present, on an average the home loan rate for a new customer is around 10.5 per cent, while for old borrowers it is 11.5 per cent or more. In the earlier year, the home loan rate for new customers was around 11.5 per cent, while for old customers it was above 12.5 per cent. So there has been a 1 per cent reduction in rates for both set of borrowers.”

“In the past two years, no permissions were given for new housing projects, but in 2012, new projects have been announced and now with interest rates expected to fall further by 0.5 per cent in the first half of the New Year, there will be buoyancy in the home loan market,” added Patel.

The retail strategy has also been working for banks. Take for instance SBI, which in October lowered its processing fee on home loans by 50 per cent up to December 31. In case of home loans, the processing fee had been slashed to 0.125 per cent for loans up to Rs 25 lakh or Rs 1,000, whichever is maximum, compared with 0.25 per cent earlier. The bank had also announced a flat processing fee of Rs 1,000 for all takeover loans. SBI offers home loans at 10 per cent for loans up to Rs 30 lakh and 10.15 per cent for loans above Rs 30 lakh. The bank’s efforts are paying off with it acquiring Rs 800 crore of home loans in the first two months of the third quarter (October-November) from rival banks and housing finance companies. Customers with over Rs 400 crore of home loans have shifted to SBI in November alone to get the benefit of its lower interest rates.

Says a senior official of SBI, “This month (December), we have done away with an additional 0.25 per cent for commercial home loans, which are called commercial real estate loans by RBI. These are home loans taken to buy third, fourth or fifth house or so and are for investment purposes. We were charging 0.25 per cent addition to the home loan rate for a CRE loan. So even CRE loans will now come at 10 per cent for loans up to Rs 30 lakh and at 10.15 per cent for loans above Rs 30 lakh.”

“Also, to those who took loans at teaser rates and are now paying 11.5-12 per cent, we are offering them to shift to current lower rates offered to new borrowers by paying 0.56 per cent of the outstanding loan,” said the SBI official.

So what will the New Year be for a retail borrower?

As a sign of times to come, HDFC Bank reduced its base rate marginally to 9.7 per cent on New Year’s eve.

KR Kamath, CMD of Punjab National Bank, said, “Retail customers can look forward to a lot of optimism next year. In case inflation stabilises, RBI will forecast its policy on development. In such a case, banks would cut rates on retail loans. Competition among banks will bring new products and services for retail customers.”

BK Batra, deputy MD of IDBI Bank, said, “Retail customers will be the most sought after by banks as corporate banking loans have remained sluggish. Therefore, banks will depend on retail customers to grow their books. Life will be easier for them in the New Year as rates will be in a softening mode. Rates have been decelerating this year as most retail loans, especially home loans, are being given at base rate of commercial banks. In home, auto, education and personal loans, the benefit is being given in terms of pricing. If RBI cuts benchmark rates, further benefits would be given to retail customers.”

With car loans being fixed-tenure loans, they have not been impacted much. Says Vibha Batra, VP, Icra Ratings, “High interest rates were not a deterrent for car loans that showed the highest growth. Car loans are short-term and are fixed rate loans. In case RBI cuts rates, car loans rates will fall too and new customers will benefit.”

falaknaazsyed@mydigitalfc.com

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