It has been a bit of an annus miserabilis as far as home loans are concerned. And that’s not just from the consumers’ point of view; who have been battling inflation and high rates on all sides; but also from the housing sector’s perspective. Take the case of State Bank of India, the country’s largest bank. Two years ago, SBI’s home loan portfolio was growing at 31 per cent. It dropped to 22 per cent in 2011 and further to 13 per cent in 2012. Today, the bank has a home loan portfolio of a little over 1.05 lakh crore, unlikely to be affected further this year.
As for the consumer, rising property prices, higher interest rates, and a slowing economy have all connived to keep them away from housing loans. The market for home loans, which is about Rs 6 lakh crore, is likely to halve this year as industrial slowdown spreads.
It is against this backdrop that the government is busy trying to spur demand. It has been persuading public sector banks to drive demand by cutting rates and they have duly obliged. The Reserve Bank of India (RBI) has chipped in by cutting the statutory liquidity ratio (SLR) that banks have to maintain (proportion of investments in government paper). Now, several PSU banks such as SBI, Punjab National Bank, Bank of Baroda, IDBI, Central Bank of India, Corporation Bank, and Union Bank have cut rates by 0.25 to 0.50 percentage points. Some have also cut the processing fee and extended their offer for the festive season.
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While this sounds good, there’s a small catch. The rate cuts are meant only for new borrowers, not existing ones. When the Damodaran Committee drew attention to this shortcoming, the RBI this April removed foreclosure and prepayment penalties on floating rate loans. The idea was to end discrimination and spur banks to offer better rates. Bank officials, however, are quite forthright about this apparent discrimination. Says SBI’s Managing Director and Chief Financial Officer, Diwakar Gupta, “If I take a ten-year deposit at 9 per cent, it will remain a 9 per cent deposit for ten years; I can’t reduce it to 8.75 per cent. It’s not fair to say that I should reduce the rates today for a loan I gave last year. The pricing at that time was that because my liabilities were also priced accordingly.”
What some banks are doing instead is to offer customers a chance to enjoy the new rates by paying a conversion fee. The SBI, for instance, allows customers to shift to new rates by paying a 1 per cent conversion fee on the outstanding loan.
Should existing customers switch loans now? While the rate cuts sound attractive, do the maths to figure out how exactly a 0.25 percentage point cut affects your loan. Remember, banks have not reduced base lending rates; they have simply selectively cut rates on some loans. Second, if you are close to loan completion, it might not make much sense to convert, as interest rates reduce towards the end of the tenure and a conversion won’t be worth the effort. Finally, calculate conversion fee vis-à-vis the interest saved. Here, it would be smart to take advantage of any festive season discounts on offer.
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Meanwhile, there are still chances of an overall base rate reduction, so borrowers might yet hope for better deals in the near future.