Govt banks to offer up to 9.25% on home loans

After RBI efforts to bring down the inflation by cutting the repo and CRR the state-run banks are willing to lower interest rates on some loans to home buyers and small businesses as part of a government initiative to boost the demand in mid of a global crisis but analysts are of view that high real estate prices will reduce the demand.

O.P. Bhatt, chairman of State Bank of India, India's biggest bank informed government banks have agreed to offer interest rates of 8.5 percent on new home loans of up to 500,000 rupees and 9.25 percent for loans between 500,000 to 2 million rupees. "The thrust is economic stimulus," Bhatt said at a conference. "The concern is to stimulate (the) economy, to create demand."

He anticipated the home loan package can result in the disbursement of 150 billion to 200 billion rupees worth of loans by June 30, 2009, by the end of the scheme.

"This will not have much effect on margins," S.K. Goel, chairman and managing director of UCO Bank, said. "The revenue that the bank will get will be affected by 2-3 basis points."

Bhatt further explained that the interest rates will be frozen for five years, after which the borrowers can opt for fixed or floating rates.

Bhatt added the banks will require a margin of 10 percent for loans of up to 500,000 rupees whereas for loans between 500,000 to 2 million rupees it will need a 20-percent margin.

A banker pointed out till now the banks have been offering these loans at interest rates ranging from 10-11.25 percent with margins sometimes as high as 25 percent for both categories.

Bhatt further added now these home loans will have no pre-payment or processing charges and the borrower will get the benefit of a free life insurance cover for the entire loan outstanding.

Official maintained that home loans below 2 million rupees constitute more than four-fifths of the mortgage portfolio of state run banks.

Bhatt said in a correlated move to boost economic activity, the banks are also planning to cut rates on existing and fresh loans to micro industries by 100 basis points effective immediately.

He added that small and medium enterprises will have to pay 50 basis points less on loans up to 100 million rupees.

It is expected that these moves by the state-run banks will follow a push of measures by India earlier this month, including $4 billion extra fiscal spending and a cut in key lending rate by the central bank to 6.5 percent, the lowest in two-and-a-half years.

Although analysts have welcomed the rate cuts but are sounding caution about the still-high real estate prices.

"Before lending starts, property prices should come down and cost of funds of the banks should come down. It will take 3-6 months for the cost of funds to come down," said Vipul Shah, an analyst at KR Choksey Shares and Securities.

Over the past five year the real estate industry was booming but from few years the real estate industry has been battling unenthusiastic sales, with purchases falling by a fifth in the first half of the year, as inflated property prices and decade-high interest rates brought an end.

"It may not be sufficient considering the overall economic downturn and high realty prices," said Hitesh Kuvelkar, associate director, research, at First Global Securities.

Though most real estate developers have cheered the move and hoped demand will pick up on softer interest rates and property prices.

While expressing his views Sanjay Chandra, managing director of Unitech Ltd said, "This will encourage a lot of people to buy and the next few months will be good for the sector".