As the mortgage rate race to the bottom hots up, foreign banks are giving

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a hard time to their Indian counterparts. They are skimming the cream in the fiercely competitive home loan market by being selective in lending to customers at the higher end, that too mostly in metro cities.

As housing prices begin to stabilise, and appreciate in some cities after last year’s reality check in the wake of global turmoil, overseas banks such as Standard Chartered, HSBC, Deutsche Bank and Citi Bank are preparing to exploit the potential of Indian home loan market.

“One interesting trend that I find is all the foreign banks offer loans mostly above Rs 20 lakh. They end up earning more in lesser number of loans when compared to the Indian banks,” said Harshad Vasani, a Mumbai-based loan agent working for Loan Solutions, a home loan-facilitating firm. He added that the foreign lenders have got aggressive in the past 1-2 years because of their cheaper funds. “They do not work on every loan application, thereby saving manpower costs, time on processing the application and checking eligibility of the applicant,” he added.

While most of the Indian public sector banks offer loans at 7.5 – 8.75 per cent with a combination of fixed and floating rates, their foreign peers are also competitively pricing loans at around the same rates. Consider this: Deutsche Bank’s new year offer fixes the interest rate at 8.2 percent for one year and then makes it floating, whereas the rate is fixed at 8.5 per cent if the customer opts to fix it for two years. Standard Chartered, which is considered to be the most aggressive among all foreign banks, is also offering loans at 8.25 per cent. Shyam Srinivasan, the bank’s country head for retail banking, does won’t call his strategy ‘aggressive’.

“I would say we are more active among the foreign banks. In fact, we have the biggest home loan portfolio when compared to the other foreign banks. It stands at $2 billion,” he said.

Despite regulatory constraints to grow and expand in smaller towns, the bank has been able to make up for the loss by focussing on credit worthy clients looking for high-value housing transactions.

“Our strategy has been focused towards premium segment. Our typical loan size varies between Rs 30 and Rs 40 lakh,” he added. “The regulatory constraints to some extent hampered our growth in smaller towns and cities. We do not have branches there,” he said, adding that the bank recently opened four new branches in non-metro towns like Cuddappa, Paranpur, Dehradun and Mathura.

Clearly, absence of banking branches coupled with the average size of the home loan seems to be a constraint when it comes to home loan offerings. “There is so much of scope for growth in the metros. Public sector banks take a lot of time in loan processing,” Vasani of Loan Solutions observed.

“The home loan market is getting active across-the-board – right from

banks to housing finance companies to foreign and private banks. This year, the growth was driven more due to balance transfer, while the coming year will be due to volume growth and improvement in average ticket size,” said Manoj Mohta, head of Crisil research. He expects the home loan market to register a growth of 9-10 per cent this year and in the next year. “This growth can be expected if the asset prices don’t move ahead of the curve. If they move ahead of the curve, then it would impact the growth negatively,” he said. He expects the volume growth in 2010-11 on better-than-expected economic growth and expectation of higher salaries. “The loan value for foreign banks is significantly higher than public sector banks because of their presence in metros or tier-I markets, where the asset prices are higher,” he added.

The bigger metros like Mumbai and New Delhi have seen slight appreciation in prices, which have seen rising transactions in the past 4-5 months. In other cities, the deal closures are still slow.

Aditi Vijayakar, executive director of residential services at Cushman & Wakefield, agrees with Mohta. “The price and buyer’s sentiment are critical in the present market as key parameters influencing sales. Capital values in select locations in NCR, Pune and Mumbai are likely to see growth in the coming months. However, if prices increase too much too soon, there is a likelihood of them correcting again shortly after; the ideal graph representing recovery should be gradual and in line with the demand that calls for a period of considerable stabilisation before the hike,” she said in a recent research report compiled by Cushman & Wakefield.

(The writer is a freelance journalist)