Rate war by SBI makes market more competitive, writes S.Suresh

Housing loan rates are being slashed. The aggression by banks and HFCs is intended to capitalise on the festival season spend and hence the special offers are valid till 30 September, 2009.

As has been always characteristic of it, State Bank of India (SBI) has set the pace offering fixed rates of 8% for the first year , 9% for the second and third year, and a rate linked to SBAR thereafter. This is a special promotional scheme called “My Home”. State Bank of Travancore has an identical scheme. With the contagion spreading, Union Bank of India (UBI) has introduced a ‘Special Combo Offer’ between May 15 and September 30 of this year, Home loans say, up to Rs.50 lakhs for a term of 10 years, will be at 8% interest for the first year and 9.5% thereafter. Punjab National Bank has just announced the PNB Festival Season Bonanza Offer 2009.Housing loans up to Rs. 30 lakhs are available at 8.5% fixed for three years. In almost all case, Processing fee and Documentation charges are waived.

These offers tend to confuse the reader as the fixed rates are different from year to year and become variable after three years. Is the differential between banks likely to make a significant difference?

How significant

An analysis has been done to understand how significant these differences in rates are to a prospective borrower. Taking the two big players State Bank of India (SBI) and LIC Housing Finance Ltd. (LICHF), we assume the borrower is seeking a 15-year term and a loan of Rs. 20 lakhs (house property valued at Rs. 30 lakhs). Such a borrowing represents a very reasonable proposition today particularly in Metros and Tier II cities.

The difference between SBI and LICHF is in the first three years. Whilst LICHF offers 8.9% rate fixed for first three years SBI is offering 8% for the first year and 9% for years 2 & 3.Our assumption is that from 4th year onwards till the 15th year the rate for both banks is identical, namely 12%. SBI is cheaper by 0.9% for year 1 and expensive 0.10% only for years 2 and 3. How significant is this difference?

There are two ways to assess the difference. The first approach is to quantify the additional ‘Interest paid’. The second is to compare the two IRRs .

When the EMI’s are compared, Rs.52 is paid additionally per month for the first year and Rs.6 saved per month for next two years by choosing LICHF. Does this look insignificant?

The analysis has been done by discounting cash flows on a monthly basis. Cash flows have been considered for 180 months taking EMIs differently for Year1 as compared to subsequent years due to interest rate being differentHousing loans are generally bigger in terms of ticket sizes compared to personal loans. This makes for a substantial impact. For a 5 year term the interest difference in absolute terms is Rs.7,920 and for 15-year term it is Rs.9, 600. On property worth Rs.30 lakhs for which a loan for Rs. 20 lakhs is taken, Rs.9600 works out to 0.32% of property cost and 0.5% of loan of Rs.20 lakhs. This could be a significant factor considering that there may really be no major product differentiation between the two organizations. This difference would be even more pronounced when private players other than LICHF who are late in reducing the rates are compared with banks.

Pricing of a Housing loan plays a key role as it brings significant economies.

As compared to Banks private sector HFCs would have a major disadvantage on rates of interest. The rate war triggered by State Bank of India has prompted most players to lower their rates. HDFC has lowered its floating rate from 9.50% to 9.0% for a loan of Rs. 30 to Rs. 50 lakhs. In case of LICHF, the above example is from their ‘Fix-o-Floaty scheme’ and LICHF had reduced the fixed rate for the first three years from 9.50% to 8.90%.

Clearly the players have no choice but to cut rates. Private players after slashing rates continue to be more expensive but there is no better time than this for them to trumpet their USPs. Speedier processing of loans, user-friendly approach etc would have takers. Already media has it that players like State Bank of India are inundated and bogged down by the huge paperwork due to increased applications.

Basking in the heat caused by the unprecedented war amongst home loan providers are the prospective borrowers. It’s party time. Happier shopping times are here for the present!

The author is Director, DMS Financial Services P.Ltd. and Visiting faculty at IIMs and can be reached at suresh.dms.finance@gmail.com.