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.”