Home loan growth, the prime driver of bank credit in the retail segment, is slowing down following the rise in interest rates. 

As per the Reserve Bank of India (RBI) data, the year-on-year growth in home loans slowed down to 46% in the quarter ended December 2022 compared to 59.4% a year ago. Banks’ total outstanding home loans stood at Rs 18,98,411 crore as of 31 December 2022. 

Amid this slowdown, many banks are growing their home loan portfolio at the cost of other banks through acquisitions. The borrowers transfer their existing home loans to other banks where interest rates are lower.  

The interest rates on home loans have jumped from 6.5% in 2021 to almost 8.8% for most banks and even touching 9.90% offered by private lender Federal Bank.

The home loan interest rate is set to rise further with the RBI indicating that the hardening of the key rate would continue as inflation stays stubborn. Earlier this month, the central bank hiked the repo rate by 25 basis points. Since May 2022, the repo rate has jumped from 4% to 6.50% through successive rate hikes. This has elevated lending rates and analysts say the impact would be felt on the real estate market. 

However, the other segments of the retail pie like vehicle loans, personal loans, credit cards and education loans have all shown good improvement during the quarter ended December 2022. 

Corporate credit for most banks has picked up while mortgage loans continued to grow at a subdued rate. If some banks are reporting high growth rates in home loans, it is partly due to inorganic growth by transfer of such loans from other banks based on interest rate differential.

In this period of rising interest rates, the bank customers are delaying their decision to take home loans. The Axis Bank management told analysts that duration from inquiry to closure of a loan is getting longer. “We have started seeing that customers are taking a longer time from the inquiry to closure of a home loan. That's what's been observed in the previous quarter. Early trends are similar in this month also, and we'll have to wait and watch how this progresses further,”said Axis Bank head of retail and payments Sumit Bali. 

On balance loan transfers, Bali told analysts that there is nothing abnormally high regarding this. “During the December quarter particularly, we have seen customers taking a longer time to convert an inquiry into the loan. Hopefully, that trend should stabilise and things should improve this quarter (January-March), but we'll have to wait and watch. The mortgage growth for the bank in the first nine months of the year was around 4%.”

Kotak Mahindra Bank is the best example of how balance loan transfers helped the bank push up its mortgage loans. “Mortgages, we had our best ever quarter on fresh volumes for home loans. A price leadership campaign of 6.5% during the festival season helped us acquire quality customers and strengthen our market share across all the customer segments,” Shanti Ekambaram, Group president, consumer banking, Kotak Mahindra Bank, told analysts. During the December quarter, the mortgage loan book grew 38% over the year-ago period and 12% sequentially.

Many banks reported a slowdown in home loan growth for the December quarter. Punjab National Bank posted a home loan growth of just 9.16% to Rs 78,684 crore for the quarter while its vehicle loans rose by 40.4% YoY and personal loans by 39.5%.

In the case of State Bank of India (SBI), both the corporate loans and retail loans are growing at the pace at 18%. Earlier, the bank’s retail loans were growing at over 20%.

The home loan growth could further moderate as interest rates climb. Said Bali, “The first quarter (of FY23) was okay. The second quarter was slightly slower, and third quarter is when it’s slowed down to about 1% growth. Q4 historically has been good. So, let's wait and watch how our Q4 pans out.”