IBSPECIAL

As the financial year draws to a close, banks are fighting for the home loan pie by cutting rates to historical lows, as they seek to build their balance sheets amid a slowdown in their corporate credit book.

Surplus liquidity is allowing banks to deploy credit in a better-yielding asset than reverse repo or government securities (G-Sec), which carries higher risk than home loans. “It is better for banks to focus on home loans. While it offers better yields than the reverse repo, it is also less risky than investing in G-Secs. The floating rate of interest on home loans provides banks that cushion. If the interest rates climb, banks can up their home loan rates,” says ICRA vice president and financial sector ratings head Anil Gupta.

Banks are finding space to launch into a rate war as the cost of funds for them has fallen. So a slide in interest rates for home loans would not squeeze their margins, several heads of leading banks told Indianbankingnews.com.

HDFC Ltd vice-chairman and chief executive Keki Mistry said lenders are keen to expand their home loan portfolios as the demand for buying homes is coming from across the country. “Government schemes like the CLSS (Credit-linked Subsidy Scheme) and stamp duty reductions have all added up to a pumped-up demand. The cost of funding has come down, which has given us the ability to pass on the benefits to the customer. So this will not impact our margins,” he told Indianbankingnews.com.

Lenders are in a position to be aggressive on increasing their home loan market share. Growing their loan book in the secure home loan segment will provide them with a buffer from the Covid-strung economy, where delinquencies may erupt from unexpected quarters. Bank credit growth is still snuggling at 5.8%, gradually picking up but much slower than the 8.5% clocked a year ago.

Despite the push, data from the Reserve Bank of India (RBI) up to 29 January 2021 showed that home loans are growing at 7.7% over the previous year to Rs 14,17538 crore. In the year-ago period, the segment was growing faster at 17.5%. Leading banks are now trying to change that pace by lowering interest rates.

State Bank of India, the biggest player in the market, has triggered the rate war by offering interest concessions of up to 70 basis points (bps), with rates starting from 6.70% for limited period till 31 March 2021. The state-owned bank further sweetened its offerings by giving a 100% waiver on processing fees, thus making it the most attractive rate in the market. The interest concessions are, however, based on loan amount and CIBIL score of the borrower.

SBI deputy managing director of retail business Saloni Narayan said, “We are extending better rates to customers who maintain good repayment history. SBI home loan rates are linked to CIBIL score. It starts from 6.70% for loans up to Rs 75 lakh and 6.75% for loans above Rs 75 lakh.”

If the applicants apply from the bank’s YONO (You Only Need One) app, they get an additional interest rate concession of 5 bps. Women borrowers also get additional 5 bps reduction in rates.

Taking a long-term view, SBI is planning to double its home loan book to Rs 10 lakh crore in the next five years. Offering interest at the lowest rates, launching digital initiatives and starting a co-lending model are some of the steps the bank is taking to grab home loan customers.

ICICI Bank, the country’s largest home financier among private banks, moved in swiftly to match rival SBI’s rates. On 5 March, the bank announced its new home loan rate at 6.70% for loans up to Rs 75 lakh, saying that its revised rate is the lowest offered by it in a decade. For loans above Rs 75 lakh, ICICI Bank is charging a rate of 6.75%. Much like its peers, the reduced rate is applicable until the end of March. The bank will, however, charge 0.25% of the loan amount as processing fees.

ICICI Bank head of secured assets Ravi Narayanan said, “In the last few months, there has been a resurgence in demand from consumers who want to buy homes for their own consumption. We believe that this is an opportune time for an individual to buy his/her dream home, considering the prevailing low interest rates.”

Close on the heels of SBI dropping its rates, private sector lender Kotak Mahindra Bank cut its home loan interest rates by a further 10 bps to 6.65%, the special rate being applicable across all loan amounts. But the rates are linked to the borrower’s credit score and the loan-to-value ratio. The bank has processing fees which can go up to Rs 10,000 depending on the size of the loan.



Kotak Mahindra Bank president of consumer assets Ambuj Chandna said, “Kotak continues to set the pace as the price leader in the home loan market and we are delighted to offer consumers a special year-end bonus in the form of even lower home loan interest rates. This is indeed the best time to buy a home.”

On 4 March, HDFC Ltd, the largest home financier among the non-banking financial companies (NBFC), reduced home loans interest rates by 5 bps to 6.75%. Mistry believes low interest rates, softer property prices, reduction in stamp duty in certain states and continued fiscal incentives on home loans would keep the demand strong. There will be demand for both affordable housing and high-value properties, he says.

The home loan market will largely be driven by the softening of property prices and a slide in interest rates. Says Gupta, “Property prices in cities like Mumbai and Delhi have not seen a substantial rise for the last five years. In some cases, there even has been price correction. Interest rates are also attractive for home buyers. These will boost demand for home loans, though there will be some negation due to job losses and salary cuts.”

The government’s CLSS scheme will drive part of the volume growth in home loans. Under this scheme, the economically weaker sections get an annual subsidy of 6.5%, while the middle-income category of borrowers get an interest subsidy of 3–4% per annum based on their income.

With its aggressive interest rate pricing, Kotak Mahindra Bank expects to cash in on demand and gain market share. But with the bank’s total home outstanding at Rs 49,977 crore, it is a small player in the home loan segment. HDFC Ltd’s outstanding home loans is at Rs 3,51,900 crore while ICICI Bank’s is at Rs 2,25,757 crore.

Will there be a shift in the home loan market share among the banks? Gupta does not think so but believes that home finance companies (HFCs) may lose market share to banks. Bigger players like HDFC Ltd may not be impacted and some HFCs like Dewan Housing Finance Corporation Ltd (DHFL) and Indiabulls Housing Finance are struggling to get out of their troubles.

How strong will be the demand for home loans and will it sustain? “A lot of it will depend on whether home loan rates continue to stay low,” summed up Gupta.