The Telegraph
Since 1st March, 1999
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Home loans to cost more

Mumbai, June 16: Leading home finance institutions today raised interest rates across the board by a sharp 50 basis points (half a per cent).

HDFC Ltd and ICICI Bank, controlling between themselves almost 60 per cent of the home loan market, raised fixed rates by 50 basis points to 9 per cent and floating rates to 7.75 per cent.

“We have been feeling the pinch as the cost of funds has moved up,” said V. Vaidyanathan, country head for retail banking at ICICI Bank.

The increase flew in the face of frequent assertions by finance minister P. Chidambaram and the Reserve Bank governor that interest rates would remain stable.

“We have been watching it closely for the last six months and interest rates on funds have moved up by 50 basis points which we have now passed on to borrowers,” Vaidyanathan added.

Real estate has been booming across the country on the back of a low home loan rate of 7 per cent, a trend that has now been reversed.

The rise is not a bolt from the blue, said analysts who have been predicting a rise. Bankers had hesitated as the government and the RBI spoke aggressively of continuing a stable interest rate regime.

The major players moved together in raising the rate, with Standard Chartered Bank joining in. Vaidyanathan said the entire industry had decided to step up rates.

HDFC’s new rates take hold immediately. ICICI Bank is bringing in the revision for fixed-rate loans from tomorrow while the floating-rate rise will take effect from July 1, 2005.

For fixed rates, the higher level applies only to new loans.

Bankers do not expect further increases in the immediate future.

“It will be stable from here,” Vaidyanathan said.

The industry was agog with talk of an increase but it was not expected to be so sharp. The expectation was of a 25-basis-point rise.

Most borrowers will now be exposed to the vagaries of a floating rate as no bank, other than HDFC and ICICI, issue fixed-rate loans.

HDFC officials have pointed to a trend of borrowers trying to convert their floating-rate loans to fixed rates in the recent past, but the scope is limited because most banks do not even offer the opportunity.

Home loan rates have remained stable primarily because of stiff competition. The home loan portfolio also forms a major chunk of business for banks.

They are relatively free of risk, though fears are being expressed in the backdrop of shooting real estate prices of a bubble that would sooner or later burst.

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