After Housing Development Finance Corporation (HDFC), ICICI Bank has decided to throw its hat

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into the ring to grab a pie of the home loan market. The largest private sector bank has joined the interest rate war in home loans, with a product that mimics arch rival HDFC’s special offer.

On Tuesday, Kotak Mahindra Bank has also announced a special home loan product for salaried customers starting from 7.99 per cent.

ICICI Bank’s new loan comes at a fixed rate of 8.25 per cent for the first two years, after which it reverts back to a floating rate. The offer reduced interest rates by 50-100 basis points for the first two years from the present applicable rates.

A senior ICICI Bank official told Financial Chronicle the cost of funds have been coming down for the bank, and this rate reduction in home loans was warranted. “When cost of funds comes down, banks rework rates. At ICICI Bank, we are constantly reviewing our rates and passing on benefits to the customers,” said the official.

The rate war in home loans was sparked off by the State Bank of India (SBI), which offered a loan with a fixed rate of interest of 8 per cent for the first year in February.

After more than a year of curtailing growth of its balance sheet, ICICI Bank now is seeking for a phase of well–rounded growth but with a lot of caution, where retail products such as home and car loans would be important growth drivers.

ICICI Bank said from the third year onwards, the rate of interest for home loans up to Rs 20 lakh will be its floating reference rate (FRR) minus 4 per cent; for loans above 20 lakh, the rate of interest will be FRR minus 3.5 per cent, and for loans above Rs 50 lakh, it will be FRR minus 3 per cent. Floating reference rate is the benchmark rate for home loans. The bank’s present FRR is 12.75 per cent.

ICICI’s special loan scheme will be applicable to loans availed between December 1, 2009 to January 31, 2010.

It was expected that ICICI Bank would follow the steps of HDFC that introduced a similar product on December 1. Historically, ICICI Bank and HDFC have always kept their interest rates on home loans almost similar.

The large number of customers shifting to the SBI scheme forced private players to follow suit. Renu Karnad, managing director of HDFC, however, denied having lost any customers to SBI and other public sector banks, which had special schemes offering 8-8.5 per cent interest on home loans.

“We have a 18 per cent growth in our portfolio and we expect to complete the year with 22 per cent growth. Our cost of funds were coming down and we decided to pass it on to our customers through the special scheme,” she said, a day after HDFC reduced rates.

Though SBI’s scheme was belittled by rivals, who accused the former of undercutting the market and dubbed it as a gimmick, the bank manages to do close to 1,000 home loan applications a day ever since the scheme was launched.

Others such as the Bank of Rajasthan have a rate of 7.5 per cent for the first year and Development Credit Bank has a limited period offer of 8 per cent.