The country's two large lenders, State Bank of India (SBI) and HDFC, sprang a surprise on December 18 by announcing a reduction in the rate of interest on home loans for new borrowers.
SBI reduced the rate on loans up to Rs 75 lakh from 10.5% to 10.15%; for loans above Rs 75 lakh, the new rate will be 10.3%. The country's largest lender also announced a five basis points discount for women. Women borrowers will be offered a rate of 10.10% for loans up to Rs 75 lakh and 10.25 for loan above Rs 75 lakh.
The rate cut will translate into a saving of Rs 23 per lakh for loans up to Rs 75 lakh to individuals other than women if the tenure is 20 years. For women, the saving will be Rs 26 per lakh.
HDFC, on its part, reduced the rate from 10.5% to 10.25% on loans up to Rs 75 lakh. The new rates are effective from 20 December 2013. However, HDFC's offer is for a limited period and is valid for new applications submitted before 31 January 2014; the disbursement has to be done by 28 February 2014.
The decision comes after the Reserve Bank of India (RBI), in its 18 December policy review, decided not to increase the rate at which it lends to banks. This came as a surprise to market analysts as well as bankers as they were expecting at least a 25 basis points increase in the repo rate due to high inflation. The wholesale price index (WPI) rose 7.5% in November as against 7% in October, while consumer price index (CPI) was up 11.24%, as against 10.2% in October.
The RBI's policy stance has hope for retail borrowers as well. The central bank says that though the inflation is high, it expects the CPI to moderate due to an expected sharp fall in vegetable prices.
"There are indications that vegetable prices may be turning down sharply, although trading mark-ups could impede the full pass-through into retail inflation. In addition, the disinflationary impact of recent exchange rate stability should play out into prices. Finally, the negative output gap, including the recent observed slowdown in services growth, as well as the lagged effects of effective monetary tightening since July, should help contain inflation," said its policy statement.
Reacting to the RBI's recent move, Axis Bank said the policy statement indicated a shift in stance. "While previous statements have been unambiguously hawkish in their inflation stance, this statement, for the first time, lays out an expectation for slowing inflation in the near term. The statement also holds out the possibility that the RBI may remain on hold if inflation behaves as expected," it said.
Will other banks follow suit and cut their lending rates?
"More banks may take cue from SBI and HDFC and cut rates. Banks have realised that they need to give a boost to this segment of their business by offering attractive rates," says Adhil Shetty, CEO, BankBazaar.com.
Brijesh Parnami, CEO, distribution, Destimoney Enterprises, says since SBI and HDFC are leaders in the home loan market, it is likely that others will follow suit. Destimoney Enterprises offers third-party home loans, lease rental discounting loans, loans against plots, etc.
However, not all banks have the room to do so as the cost of funding differs from lender to lender.
Ehsan Syed, director, Banking, India Ratings, says, "Banks with high CASA (current account savings account) deposit balances have room for reduction in lending rates as their cost of funds is low. However, midsized government banks could find it tough to cut lending rates as their net interest margins are already under pressure due to high delinquencies. As far as deposit rates are concerned, large banks can reduce rates but for most mid-sized banks it may be difficult due to funding issues."
However, deposit rates may take longer to fall, primarily because there are still chances of a 25-50 bps increase in the repo rate. Banks will wait and watch before taking a decision on revising deposit rates as they need to offer an attractive return to depositors given the high inflation rates.
Banks have been finding it tough to mobilise deposits as real interest rates have become negative owing to high inflation and savings are being channelled to physical assets like gold and real estate.
Banks are currently offering 9-9.5% annual interest on deposits for 3-5 years tenure. The consumer price inflation has been on an average above 10% for the past five years. At present, bank credit growth is 15.5% compared to deposit growth of 15.4%.