UPHILL TASK

New Delhi, June 22: Interest rates on home loans could rise, if the Reserve Bank of India (RBI) crimps money supply to thwart inflation.

“Banks could look to increase home loan rates by a maximum of 50 basis points in the next fortnight to keep up with the central bank’s anti-inflationary measures,” said U.S. Bhargava, an independent banking analyst. Current home loan rates range between 10 per cent and 13 per cent.

Bankers expect the RBI to raise the repo rate. A hike in the repo rate — the interest rate at which banks borrow money from the central bank — will mean a higher cost of funds for banks, which will impact the rate at which banks lend to customers.

The central bank had increased the cash reserve ratio (CRR) by 75 basis points between April and May this year. However, with liquidity at reasonable levels, banks had managed to keep the home loan rates constant and in some cases even reduced the rates slightly. CRR is that portion of bank deposits that have to be mandatorily kept with the RBI.

Recently, the RBI also reduced the risk weightage on home loans up to Rs 30 lakh to 50 per cent for capital adequacy purposes. As a result, some large banks reduced the interest rates by 0.25 percentage points on smaller loans.

HDFC Bank has already hiked its prime lending rate (PLR) by 0.25 percentage points. PLR is the interest rate that banks charge from their most credit-worthy customers. The bank will take a decision on raising interest rates on home loans by the end of this month.

According to K. Raghuraman, executive director of Punjab National Bank, “A rate hike is definitely on the horizon. However, the bank will wait for the RBI’s quarterly credit policy before taking a call on increasing rates.”

Bankers, however, fear that a rate hike may increase the default rate on housing loans. “Jacking up home loan rates will increase the pressure on EMIs (equated monthly installments), which may lead to an increase in the default rate,” said Prakash P. Mallya, chairman and managing director of Vijaya Bank.

Industry analysts say high lending rates may also reduce the rate of growth in the housing loan sector. “The rate of home loan growth has already seen a slowdown in the last six months. Another round of rate hike could see the annual growth rate falling to 10 per cent,” said Bhargava.