FinMin proposes incentive to borrowers of small home loans

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According to Chidambaram, housing is a major driver of the economy and the banks can give incentive to borrowers of housing loan of less than Rs.20 lakh by lowering interest rates.

As 80 percent of loans sought by borrowers are well within the range of Rs.20 lakh and there is hardly any record of default in repayment of this amount, Chidambaram said that the Reserve Bank of India (RBI) can provide interest relief for those who borrow within this limit.

Speaking to industry body, ASSOCHAM, the finance minister said, "I made a number of efforts to impress upon bankers in this regards. It is a constant effort that I will have to make. Bankers will have to take a call, RBI will have to take a call."

Home loans form 12-35 percent of loan portfolios of banks. The total housing loan portfolio of banks and housing finance institutions is about Rs.2,00,000 crore ($50 billion) of which state-owned banks account for more than Rs.1,40,000 crore ($35 billion) as of March last year.

According to RBI, home loans have grown by a modest 15 percent as of January 2008.

Earlier, following the finance minister's call for a cut in February, some public sector banks such as the State Bank of India, Canara Bank, Allahabad Bank and the Bank of Baroda had reduced their general lending rates by 25 to 50 basis points (0.25-0.50 percent).

Most banks currently charges home loans ranging between 9.5-12 percent.

"We have the lowest interest rate in the market at 9.25 percent. So there is no scope of cutting it any further," The Telegraph quoted K. Raghuraman, executive director, Punjab National Bank, as saying.

However, Calcutta-based Uco Bank said it may slash housing loan rates by 50 basis points within March 15.

"I have not heard about the finance minister's comments. But the fact is that, with lower risk weightage, the benefit of pricing should go to the customer. We were in fact the first bank to do it," said M.V. Nair, chairman and managing director, Union Bank of India.

A few public sector banks like Union Bank of India and State Bank of India have differential rates for home loans below Rs.20 lakh. For instance, State Bank of India charges 10-11.5 percent for loans up to Rs.20 lakh. Private sector banks still have flat rates irrespective of the amount.

"The finance minister's suggestion looks logical but banks have to also look at other factors like competition, cost of funds and what is the bank gaining. Having said that, the finance minister's suggestion will definitely trigger a thought process among banks," said an Axis Bank official. The bank has only 30-40 percent of home loans below Rs.20 lakh, the official said.

While India's No.3 bank, HDFC Bank has brought the home loan rate down by 25 basis points to 13.75 percent, its bigger rival ICICI Bank has said that it may soften rates in the first quarter of the next fiscal.

According to market analysts, the finance minister's proposal will address the problems of middle class and low income group housing. However, actual benefit that may trickle down to the borrower may be little. "In practice, banks charge higher interest rates for small loan amounts and low rates for high amounts," a technical analyst with a top lending institution said. "For instance, interest rates on home loans of over Rs.1 crore are around half a percentage point lower than rates offered for loans up to Rs.50 lakh. And those between Rs.50 lakh and Rs.1 crore cost 25 basis points less than loans up to Rs.50 lakh."

"Bankers attribute this mainly to lower cost of servicing and overheads," he said.