The Telegraph
Since 1st March, 1999
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Home loan shelter

Mumbai, April 24: Home loan borrowers can breathe easy: interest rates on loans below Rs 20 lakh could ease by at least 25 basis points.

The RBI, which made no changes in its benchmark interest rates in its annual policy statement today, has lowered the risk weight on home loans up to Rs 20 lakh from 75 to 50 per cent.

The central bank said the decision to reduce the risk weightage on these loans would be reviewed after a year.

A lower risk weight means banks will have to set aside less capital for every rupee they lend. The provisioning is part of prudential regulations to ensure banks are adequately covered when loans turn bad.

A 25 basis-point cut in interest rates would amount to a saving of Rs 166 per month in equated monthly instalments (EMIs) on a Rs 10 lakh loan taken for a period of 20 years. Hundred basis points equal one percentage point.

“By lowering the risk weightage, we want to send a message to banks to provide relief to people taking housing loans below Rs 20 lakh by re-pricing their rates,” RBI governor Y.V. Reddy said.

The percentage of borrowers who seek home loans of up to Rs 20 lakh vary between 65 and 85 per cent, depending on the bank. Private and foreign banks have fewer borrowers in this category than their public sector counterparts.

The reduction in the risk weightage will allow banks to lend more since they will be making lower loan provisions.

“Bankers can now not only lend more, but they will pass on the relaxation to borrowers. Rates could dip by 25 to 50 basis points,” a banker said.

“We will take a fresh look at our loan portfolio,” said Aditya Puri of HDFC Bank.

K.V. Kamath of ICICI Bank said the bank would review its cost of funds and decide whether it needed to revise its rates. Recently, ICICI Bank had increased its home loan rates by one percentage point to 14 per cent for fixed rate loans and to 12 per cent for floating rate loans.

Most public sector banks, led by SBI, did not raise home loan rates during the latest round of hikes in April. These banks are unlikely to revise their rates now.

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