Cheaper home loans ahead

With RBI’s stance increasingly shifting towards supporting growth and recent moderation in core WPI inflation, the apex bank is set to ease the repo rate by 0.5 per cent in the fourth quarter of 2013

Cheaper home loans ahead
Your home loan rate is likely to fall in the coming months. The reasons are plenty. Last week, the November index of industrial production (IIP) contracted marginally by 0.1 per cent year-on-year, compared with a healthy 8.3 per cent year-on-year growth in October owing to possible drawing down of inventory build-up due to pre-festival season demand.

Also the wholesale price index (WPI) inflation moderated to 7.18 per cent year-on-year in December from 7.24 per cent in November, below expectations, as higher food inflation was more than offset by lower core inflation. Core inflation moderated to 4.2 per cent year-on-year in December from 4.5 per cent in November, aided by lower momentum and base effects. By contrast, food (primary and manufactured) inflation rose to 10.4 per cent year-on-year from 9 per cent, as the seasonal decline in food prices was less than expected. Fuel price inflation eased to 9.4 per cent year-on-year from 10 per cent. Separately, headline CPI inflation rose to 10.6 per cent year-on-year from 9.9 per cent in November on higher food prices.

Most economists and thinktanks believe that the Reserve Bank of India’s stance has increasingly shifted towards supporting growth rather than focusing solely on inflation management and with the recent moderation in core WPI inflation, the apex bank may ease the repo rate by 0.5 per cent in the fourth quarter of 2013.

Repo rate is the rate at which banks borrow money from RBI and an increase or decrease in the same impacts the interest rate on loans, mortgages and deposits.

Says Sonal Varma, economist at Nomura Financial Advisory and Securities, “In our view, underlying inflation expectations remain sticky as evidenced by high CPI readings. Yet, with core WPI inflation clearly moderating — indicative of weak demand-side pressures — we stick to our view that the RBI is likely to cut the repo rate by 25 basis points at its January 29 policy meeting. However, we do not see this as the start of a long rate cut cycle and expect only 50 basis points cut in H1 as we expect inflationary pressures to re-emerge in H2.”

One basis point is one hundredth of a per cent or 0.01 per cent.

Says Taimur Baig, chief economist, Deutsche Bank, “We have concluded that the somewhat favorable WPI developments seen in recent months could nudge RBI toward a 25 basis points rate cut in the January policy meeting, but it’s likely to be a much tighter call than the market thinks.”

Most banks have already indicated that if RBI lowers rate, they will pass the benefits to their customers. A few days ago, HDFC Bank, the country’s second largest private sector bank, reduced its base rate by 10 basis points to 9.7 per cent. The base rate is the benchmark to which all loan rates are linked. With this cut, HDFC Bank has the lowest base rate among major lenders, lower than that of State Bank of India (SBI) and ICICI Bank; both banks have a base rate of 9.75 per cent. HDFC Bank also said it will reduce its benchmark prime lending rate (BPLR), the erstwhile loan reference rate, by a similar magnitude to 18.2 per cent.

A senior official of SBI, said, “The decision of a bank to cut rates depends on its assets and liabilities. The probability of a bank to reduce base rate is high if RBI reduces the repo rate and the reverse repo rate or cuts the cash reserve ratio (CRR).”

BK Batra, deputy managing director of IDBI Bank, said, “If RBI cuts benchmark rates, further benefit will be given to retail customers. Life will be easier for them in 2013 as rates will be in a softening mode. Rates for retail customers have been decelerating in 2012 as most retail loans especially home loans are being given at base rates of commercial banks.”

A senior official of Central Bank of India said, “If RBI cuts the repo rate on January 29, banks may go for a reduction in base rates. But if RBI cuts CRR, banks may selectively tweak some lending rates, but would not reduce base rate.”

The past two years have been difficult for home loan borrowers. With the central bank continuing its war on inflation and raising key policy rates several times, home loan borrowers saw their interest rate 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 to own a house. Home loans rates were at 11.5-14 per cent on a floating rate basis in April 2012. Customers who had earlier opted for teaser rate scheme of banks in 2008-09 had also got adjusted to these rates. However, rising competition and a few rate cuts from RBI forced many banks to give home loans below Rs 30 lakh at their base rate.

At present, on an average, the home loan rate for new customers is around 10.5 per cent, while for old borrowers it is 11.5 per cent or more. So there has been a 1 per cent reduction in rates for both sets of borrowers since July 2012.

Home loan borrowers first got some relief in April 2012 when RBI in its annual monetary policy cut the 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) to provide additional liquidity cushion to the banking system. 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. 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 – SBI – reduced its home loan rates by 0.50-0.85 per cent. Then, in its second quarter review of the monetary policy in October, the central bank cut the cash reserve ratio (CRR) by 0.25 per cent to 4.25 per cent of their net demand and time liabilities.

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 2012 (with the beginning of the festive season), banks have been reducing interest rate on home loans, waiving processing fees, offering cash back and EMI waivers, hosting property exhibitions to pep up demand for home loans for second half of 2012-13 to pep up demand for home loans. A few months ago, Axis Bank launched ‘happy ending home loan’, a product that waives the last 12 equated monthly instalments (EMIs) if the customer has paid all EMIs on time. Following this, ICICI Bank launched a home loan product that offers 1 per cent cash back on every EMI. Many public sector banks have launched combo offers where a home loan customer gets an additional 0.25-0.5 per cent interest rate reduction on an auto loan.

The retail strategy has also been working for banks. Take for instance SBI, which has witnessed Rs 1,800 crore of home loan growth in December, against Rs 1,500 crore recorded in November 2012. In October, SBI had lowered its processing fee on home loans 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 has 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.


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