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Home loan majors plan rate rejig

New Delhi, June 3: Housing finance titans are preparing to rejig their home loan rates.

While Housing Development Finance Corporation (HDFC) is considering the option of raising floating home loan rates by 0.5 per cent at the end of this month, state-owned LIC Housing Finance is getting ready to slash its fixed home loan rate by 0.25 per cent with immediate effect.

The LIC arm does not plan to touch its floating home loan rates.

“We are reviewing home loan rates and watching the market very carefully. The volatility has begun again. A decision to this effect will be taken by the month-end. However, it will not call for more than half a per cent increase,” said HDFC executive director Renu Sud Karnad.

The other big player, ICICI Bank, has no plans to revise its rates. “We are not looking at any changes at the moment,” said Rajeev Sabharwal, head of home loans at the bank.

The two housing finance companies, HDFC and LIC Housing Finance, have different motivations for their contrarian actions.

While HDFC believes the interest rate scenario will harden (as indeed RBI governor had indicated when he released the credit policy in April), LIC Housing Finance is making an aggressive rate cut to wean away business in the fixed-rate home loan segment.

While admitting that the interest rate scenario is hardening, a senior executive from the LIC arm said: “It is a very competitive market. And hence, we are taking steps in this direction.”

“Lowering interest rates might squeeze our profit margins but it will also increase the disbursement of loans. In effect, we will be able to maintain an equilibrium,” He added.

The current floating loan rate offered by HDFC hovers around 7.5-8 per cent. Under the fixed option, the pure fixed rates vary between 8.5 and 8.75 per cent. It also offers a fixed home loan rate (with the money market clause, which allows a recalibration of the rate when the interest rate scenario turns volatile) between 8 and 8.25 per cent.

In line with the increase in home loan rates, HDFC may also hike the rates on its deposit schemes. “Usually, the two of them go hand in hand. If home loan rates increase, yields on deposit schemes are also bound to go up at the same level,” Karnad said.

A bank pegs its lending rate to its borrowing costs. So, prices of both move northwards or southwards simultaneously. Karnad says the home loan industry is expected to grow between 25 and 30 per cent on an average this fiscal, but the real rise will be witnessed in tier II and III or B category cities.

These include places like Jaipur, Chandigarh, Indore, Amritsar, Kerala and Pune. “For a while, overall growth in major metros may slow down because they have developed to quite an extent. It’s time for the smaller cities to grow,” she added.

She said the Bengal real estate market was booming. “It is the Rajarhat and Salt Lake area which are developing very fast. A lot of builders are taking up projects here.”

In Bengal, HDFC witnessed a growth of 35-38 per cent last year. According to Karnad, the company expects a similar kind of growth this year as well.

The housing finance industry is concerned with two broad issues: first, they fear disbursing loans to non-serious investors with a short-term outlook. “This creates uncertainty in the market,” said Sud Karnad.

Second, with international real estate developers gung-ho on the Indian market, quick clearances for projects are imperative.

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