Public sector banks cut home loan interest rates

Public sector banks on Monday announced a low interest rate package for home loans of up to Rs20 lakh in a bid to boost a faltering property market.

Starting Tuesday, the banks will offer home loans of up to Rs5 lakh at an interest rate of 8.5%, and of Rs5-20 lakh at 9.25%. Currently, banks charge about 10.5% as interest for home loans in this range.

The scheme will be available to new customers and is valid till 30 June. The new rates will remain unchanged for five years.

“The aim is to stimulate new demand and the housing sector is critical to the economy as many other sectors like steel, cement are depended on this sector,’’ said O.P. Bhatt, chairman of State Bank of India . “Almost 80% of the public sector banks’ home loan portfolio is made up of loans up to Rs20 lakh. We expect to disburse home loans in the range of Rs15,000 crore to Rs20,000 crore under this window.’’

Borrowers have to set aside 10% of the loan amount as margin for loans of up to Rs5 lakh, and 15% for loans of Rs5-20 lakh. Any further cuts in rates under this scheme would be passed on to customers. Besides, the banks have waived processing fees and pre-payment penalties under the scheme, and are also offering free insurance cover.

“The free insurance cover will have an impact of about 25 to 35 basis points on the banks’ costs. The cut in interest rates should have an impact of about 2-3 basis points on the banks’ margins,’’ said T. Narayansami, chairman and managing director, Bank of India, and chairman of Indian Banks’ Association (IBA).One basis point is one hundredth of a percentage point.

Private and foreign banks haven’t decided yet on following their public sector counterparts.

“This (scheme) will help create demand in the tier II and tier III centres...(but will) not help customers in the metros,” said Pranay Vakil, chairman, Knight Frank India Pvt. Ltd. “(But) this package will make private banks and housing finance companies think in terms of rates as nobody wants to lose market share.’’

Meanwhile, the Delhi Development Authority (DDA), which will draw lots on Tuesday to allot 5,010 apartments, does not expect the slump in the housing sector to affect its sales.

“We don’t expect any downward trend, because we are selling 40% cheaper than market rates,” DDA spokeswoman Neemo Dhar said.

The agency had sold about 1.2 million applications with nearly 566,000 people paying Rs1.5 lakh each as deposit to be eligible for the draw.

“In Delhi, there is a supply demand mismatch because of the shortage of housing and because only DDA can build, so I don’t think the current environment will have a big impact,” said Sanjay Verma, executive director, South Asia, for real estate consultancy Cushman and Wakefield.

(Rahul Chandran in New Delhi contributed to this story.)