Banks might extend festive offers for two months, not raise loan rates

Every year at the time of Dussehra and Diwali, the demand for loans increases keeping in mind the holiday season ahead banks have decided not to raise home loan rates.

However, when the Reserve Bank of India had revised its police rates in mid-September, several banks had said they might increase their lending rates in October when the base rate, on which loans are priced, is reviewed.

This year also, considering the festival months of October and November, banks may opt for not raising loan rates seeing huge demand in personal, car and home loans, as this is considered to be an auspicious time to buy homes or other assets. During this period, most banks offer special schemes featuring discounts in the form of a waiver in processing fees and lower rates to attract customers.

Oriental Bank of Commerce CMD TY Prabhu said, “Banks may not hike home rates immediately since sales are expected to pick up soon after the Pitr Paksha is over.” During Pitr Paksha (shards), which is related to rites performed by Hindus, many people consider it inauspicious and choose not to take any major investment decisions.

On the other hand banks might be under pressure to raise lending rates in October as their cost of funds has increased by 50 to 100 basis points during the last quarter. Interest rates on bulk deposits and certificate of deposits have crossed 8% for one year compared with 7% a few months ago. Thus, Mr Prabhu said if banks are under pressure to raise lending rates, they might raise the base rate but will also narrow the spread between the base rate and home loan rates. At present, banks have set their base rate in the range of 7.50% to 8%.

The State Bank of India special home loan scheme is going to end on September 30, but its officials have said most probably bank will extend the scheme for another quarter to attract customers in the festive season. Under the special scheme SBI is offering a fixed rate of interest of 8% in the first year, 9% in the second and third year, after which the floating rate is applicable.

Punjab National Bank, the second-largest bank, under its festive offer on home loans has fixed rate of interest of 8.5% for the first three years and afterwards the prevailing floating rates will be applicable.

Last week, Corporation Bank also launched its special home loan and vehicle loan scheme, known as grand festival offer, in which it is offering loans up to Rs 30 lakh at base rate of 7.75% for the first year and 50bps above the base rate for second and 8.25% in the third year. But bank will charge 0.25% more if the loan is above Rs 30 lakh. SM Swati, general manager in charge of retail lending at Corporation Bank said, “So far, demand for home loan has not been very encouraging, although we are better than the peers. But with this offer, we expect to deploy Rs 1,000 crore.”

Indiabulls Financial Services launches special home loan scheme for salaried class

Indiabulls Financial Services, a financial service provider launched a special home loan scheme for the salaried class. Under this scheme it is offering 8.5% interest up to March 31, 2011, followed by 9.5% till 2012, the company said in a statement.

It said, subsequently from the third year onwards 9.5% floating rate will be charged.

Earlier, country largest mortgage lender HDFC had launched a dual rate home loan (DRHL), in which for the initial year fixed interest will be charged and later it will change to floating rate.

All the new home loan customers, to avail the new DRHL-4 offer have to apply on or before September 30 and take at least part disbursement before October 31.

Indiabulls Financial Services CEO Gagan Banga said, "Introduction of this new home loan scheme at 8.5 per cent is a move to augur the aggressive growth plans, with an annual target of Rs 6,000 crore worth new home loans disbursement."

The borrowers can avail offer at 140 cities and towns across India.

"We plan to grow our home loans business by 40-45 per cent this fiscal and increase our market share from the current 4 per cent to 10-15 per cent by 2014," Banga added.

He said every year company is in the process of adding 25-30 cities to its distribution network and, also increasing the sales strength by 25-30 per cent, at present its sales strength is of 1500.

State-run banks and HFCs to lend more for low-cost housing

The finance ministry will be pushing state-run banks and housing finance companies to set aside more funds for the low-cost housing projects.

The ministry of housing and urban poverty alleviation said that low subsidy demand from banks clearly indicates to the extremely bad lending to low-cost housing.


A finance ministry official told the ministry has asked the banks to submit details about their exposure towards low-cost housing and the reasons for slow progress.

However the government has set aside an interest subsidy of Rs 1,100 crore for four years up to 2012 for the low-cost housing scheme for the urban poor, but, as per government records there has been claim of only Rs 4 crore from banks.

An official working with ministry of housing said, “We’ve requested that all public sector banks should be asked to increase their lending towards the segment so that subsidy amount provided for the scheme is utilized.”

Government is also planning to ask the regional rural banks to lend to low-cost housing for this it will make these banks eligible for the interest subsidy on loans under the scheme.

National Housing Board (NHB) and HUDCO have been made the nodal agencies which will provide 5% interest subsidy on housing loan given to economically weaker sections and low income groups.

However government has instructed 17 state-run banks and six housing finance companies to provide these low-cost loans. On the other hand, bank say that the local authorities are directly responsible for low disbursals as the borrower is required to provide evidence to prove his eligibility for the subsidy.

Bank of Baroda official said, “The inordinate delays on their part is reflective in low credit off take.”

To solve the problem the government has decided to give the authority to the banks to decide on the eligibility of the borrower. NHB executive director RV Verma said, “It has been decided that banks on their own assessment can provide these certificates and disburse loans.”

Up till March 2012, government is planning to provide subsidy support to over 3 lakh low cost houses. “The scheme is a blend of achieving social needs while maintaining a profitable orientation for the banks. Banks will finally see its a win-win situation for them,” Mr Verma said and added that in states such as Andhra Pradesh, Tamil Naidu and Madhya Pradesh the scheme is successful.

Under this scheme banks can sanction a maximum of Rs 3 lakh to a borrower belonging to economically weaker category and Rs 5 lakh to a low income one. Moreover scheme provides a subsidy of 5% for a loan amount of Rs 1 lakh for the full tenure of the loan.