The Reserve Bank of India (RBI) has instructed banks to give loans on ‘base rate’ instead of the PLR. The new system will start from April 2010. The base rate will be calculated on a cost-based formula and will be lower than the PLR, although banks will be free to charge a risk spread over the base rate but they cannot lend below the base rate.
However banks have asked for the clarity from RBI on pricing of old home loans once the new ‘base rate’ is adapted as loans given for a longer duration i.e. for 15-20 years, do not have any provision for replacing the prime lending rate (or PLR) – the anchor interest rate to which the floating rates are linked.
Moreover RBI has instructed banks that during the renewal of loans or resetting interest charges, banks should take the ‘base rate’ as the anchor rate. The home loan agreements are like other loan deeds, are legal documents, according to bankers many retail borrowers might resist a switchover from PLR to ‘base rate’ and signing on a new agreement.
Then bankers will also have to struggle with the fact there is no renewal date in case of home loans and existing loan agreements are for the entire tenure of the loan. Also, as the base rate is a floor rate, thus bankers might have to hike the interest rates on some home loans if the base rate of the bank is higher than the existing loan rates.
At least three senior bankers told ET as there is uncertainty on the matter thus they are seeking clarity from RBI on this. “The moot point is the floating rate home loan do not have renewal clause, making it difficult for banks to link these loans to base rate. Alternatively, banks can give customers an option to shift to base rate. But, if customers have availed of loan at rate lower than the base rate, they may resist shifting to base rate. Banks also cannot force base rate on them as it’s a legal document (loan agreement).”
According to bankers the other alternative can be to maintain two parallel rates – PLR and base rate till the maturity of all old loans in their book. But bankers say, RBI might not approve this move.
The RBI main aim is to eliminate the discriminatory prices for old and new customers. At present the old home loan customers are paying higher interest rate in comparison to new home loan borrowers, even though both of them have taken floating rate loans. According to banks they offered new loans at cheaper rate because their incremental cost of funds has come down. But RBI argues that reduction in incremental cost results in reduction of overall cost of funds and thus the benefit of lower rate must be passed to the old home loan borrowers as well. Therefore, if BPLR continues to be anchor rate for old home loans, it might counteract the purpose of introducing base rate.
A senior banker said, “In case of short-term loans given to corporates, individuals and small businessmen, banks may have to keep alive its BPLR. But whether it can be kept active for home loan which has a 15-year maturity is yet not clear.”
The main reason for RBI to introduce the base rate system is to improve the transmission of policy rate to the credit market. Frequently RBI has observed that whenever the policy rates have been reduced banks have not reduced the lending rates by the same quantum. In the policy document of January 2009, RBI governor, D Subbarao pointed out, “While changes in RBI’s policy rates were quickly transmitted to the money and government securities markets, transmission to the credit market was slower. Evidently, the transmission is still in progress.”
Between October 2008 and December 2009, RBI considerably reduced policy rates — the repo rate by 425 basis points and the reverse-repo rate by 275 bps. CRR was also reduced by 400 basis points of NDTL. But the public sector banks reduced BPLR by 125-275 basis points, followed by 100-125 basis points by private banks and 125 basis points by five major foreign banks.
Friday, February 26, 2010
Tuesday, February 9, 2010
Axis Bank leads in withdrawing teaser home loan scheme
After the Reserve Bank of India has hiked cash reserve ratio (CRR) there are chances banks might start withdrawing teaser home loan offers. Axis Bank India’s third- largest private bank has announced to withdraw its teaser home loan scheme two months before the schedule tenure.
Earlier on January 6 bank had launched a fixed-cum-floating rate home loan scheme. Under this scheme bank has been offering 8.25 per cent interest rate for the first two years. Bank charges 3.5 per cent and 3 per cent interest on loan which is less than the mortgage reference rate for loans up to and above Rs 30 lakh, respectively.
A senior bank executive informed that as the CRR has been hiked due to which it would not be possible for bank to offer a fixed rate for two years. But it will continue to offer 8 per cent fixed rate for the first year.
The bank has also removed the product information from its website. This move of bank has surprised many. A direct selling agent had applied for home loan under the scheme said, “With Axis Bank suddenly withdrawing its teaser rate scheme, I am approaching other banks.”
Last year a number of banks launched special teaser home loan schemes led by countries largest, State Bank of India and Axis was one of the last banks to offer such a scheme.
A senior SBI executive has informed that with the hike in CRR the cost pressure is increasing, but bank will fulfill its commitment and continue to offer the product till the end of March.
However under Housing Development Finance Corporation’s the sanction of loans under teaser rate scheme will close on February 13. The disbursement of loans will be completed by March 31. The Axis bank scheme was advantageous as there was no prepayment penalty. According to industry source, “After two years, if the bank’s rates go up sharply, customers can shift to other banks without any penalty.”
On the other hand, other banks are charging around 2 per cent of the outstanding amount as pre-payment penalty. The hike in CRR by 75 basis points done by RBI is expected to absorb around Rs 36,000 crore from the system. Therefore, this along with advance tax outflows in mid-March is likely to reduce liquidity. In view of this in March most of the banks are likely to review their teaser loan schemes.
Earlier on January 6 bank had launched a fixed-cum-floating rate home loan scheme. Under this scheme bank has been offering 8.25 per cent interest rate for the first two years. Bank charges 3.5 per cent and 3 per cent interest on loan which is less than the mortgage reference rate for loans up to and above Rs 30 lakh, respectively.
A senior bank executive informed that as the CRR has been hiked due to which it would not be possible for bank to offer a fixed rate for two years. But it will continue to offer 8 per cent fixed rate for the first year.
The bank has also removed the product information from its website. This move of bank has surprised many. A direct selling agent had applied for home loan under the scheme said, “With Axis Bank suddenly withdrawing its teaser rate scheme, I am approaching other banks.”
Last year a number of banks launched special teaser home loan schemes led by countries largest, State Bank of India and Axis was one of the last banks to offer such a scheme.
A senior SBI executive has informed that with the hike in CRR the cost pressure is increasing, but bank will fulfill its commitment and continue to offer the product till the end of March.
However under Housing Development Finance Corporation’s the sanction of loans under teaser rate scheme will close on February 13. The disbursement of loans will be completed by March 31. The Axis bank scheme was advantageous as there was no prepayment penalty. According to industry source, “After two years, if the bank’s rates go up sharply, customers can shift to other banks without any penalty.”
On the other hand, other banks are charging around 2 per cent of the outstanding amount as pre-payment penalty. The hike in CRR by 75 basis points done by RBI is expected to absorb around Rs 36,000 crore from the system. Therefore, this along with advance tax outflows in mid-March is likely to reduce liquidity. In view of this in March most of the banks are likely to review their teaser loan schemes.
Thursday, February 4, 2010
Canara Bank to double home loan portfolio by Dec, 2010
Canara Bank, Bangalore-based public sector lender has set a target to double its home loan portfolio to around Rs 17,500 crore by December 2010. as of December 2009, bank’s home loan portfolio stood at Rs 8,464 crore, little over 5 per cent of the total advances informed the bank’s executive director K L Jagadish Pai.
During the announcement of bank’s third quarter financial results he told Business Standard, “We had actually set a target to achieve at least 10 per cent of our loan portfolio from home loans by March-end 2010. But, it is not possible in the remaining two months and we intend to disburse another Rs 6,000 crore during the first three quarters of the next financial year-ending December 2010.” Meanwhile for the year-ending March 2010, the bank aims to achieve Rs 1,75,000 crore advances.
He told, however the bank has performed better in home loan sector and was able to achieve 27 per cent growth in the first three quarters of the present fiscal-ended December 2009 against the corresponding period last year. In August 2009 the bank had launched a home loan scheme in which it offered 8 per cent interest rate for the first year and 9 per cent for the second year and 10 per cent for the remaining period of the loan for individual home loan customers. The scheme has been extended up to March 2010.
Pai said, “The real estate sector is reviving and people are coming back for loans. We are the bank with lowest exposure to real estate among our peers. Our exposure to commercial real estate is less than Rs 2,600 crore presently compared to Rs 2,900 crore at the beginning of the fiscal. We are looking at financing more and more Bangalore-based real estate companies so that we will get more individual accounts during this year.”
In view of long gestational period bank is aiming to increase housing loans. He said the sanctions are likely to touch 10 per cent of the asset book of the bank, but the disbursal can be less. He added for the next two months of the present fiscal, the bank is likely to disburse another Rs 500 crore.
He told bank has opened more retail hubs whose number has increased to 37 across Tier-I, Tier-II and Tier-III cities in the country. He said, “We are targeting 10 accounts per day for each retail hub.” Thus the bank aims to target more of individual home loan seekers than the commercial real estate sector. The loan amount of these loans will be around Rs 15-20 lakh.
He added, the bank has not been aggressing in lending to commercial real estate segment in spite of big demand for funds, and said that at present the total exposure will stand around Rs 2,000 crore. He told, “We are not bullish on commercial real estate like many other banks.”
He said the present sanction of loans by the bank stand at close to Rs 30,000 crore, and added part of it will be disbursed over next 18 months.
During the announcement of bank’s third quarter financial results he told Business Standard, “We had actually set a target to achieve at least 10 per cent of our loan portfolio from home loans by March-end 2010. But, it is not possible in the remaining two months and we intend to disburse another Rs 6,000 crore during the first three quarters of the next financial year-ending December 2010.” Meanwhile for the year-ending March 2010, the bank aims to achieve Rs 1,75,000 crore advances.
He told, however the bank has performed better in home loan sector and was able to achieve 27 per cent growth in the first three quarters of the present fiscal-ended December 2009 against the corresponding period last year. In August 2009 the bank had launched a home loan scheme in which it offered 8 per cent interest rate for the first year and 9 per cent for the second year and 10 per cent for the remaining period of the loan for individual home loan customers. The scheme has been extended up to March 2010.
Pai said, “The real estate sector is reviving and people are coming back for loans. We are the bank with lowest exposure to real estate among our peers. Our exposure to commercial real estate is less than Rs 2,600 crore presently compared to Rs 2,900 crore at the beginning of the fiscal. We are looking at financing more and more Bangalore-based real estate companies so that we will get more individual accounts during this year.”
In view of long gestational period bank is aiming to increase housing loans. He said the sanctions are likely to touch 10 per cent of the asset book of the bank, but the disbursal can be less. He added for the next two months of the present fiscal, the bank is likely to disburse another Rs 500 crore.
He told bank has opened more retail hubs whose number has increased to 37 across Tier-I, Tier-II and Tier-III cities in the country. He said, “We are targeting 10 accounts per day for each retail hub.” Thus the bank aims to target more of individual home loan seekers than the commercial real estate sector. The loan amount of these loans will be around Rs 15-20 lakh.
He added, the bank has not been aggressing in lending to commercial real estate segment in spite of big demand for funds, and said that at present the total exposure will stand around Rs 2,000 crore. He told, “We are not bullish on commercial real estate like many other banks.”
He said the present sanction of loans by the bank stand at close to Rs 30,000 crore, and added part of it will be disbursed over next 18 months.
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