The Home Loan Rate Pendulum
By Joseph Samson
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In the staring of 2007 banks were charging about 9.25%-10% for floating rate loans and close to 11% for home loans on fixed rate term. A repo hike by RBI to 7.50 % at this point raised prime lending rates (PLR) which prompted banks and institutions to increase home loan rates by a 25 to 50 basis points. Almost all the banks including the banking majors' State Bank of India and ICICI Bank followed this hike. ICICI bank's revised floating rate stood at 11.75% per annum, against 10.75% earlier.

Again in April 2007, the benchmark PLR was raised and all loans including home loans became expensive. The PLR was raised in the wake of policy tightening by RBI. However the gap between PLRs of SBI and its private sector counterparts remained wide. The mark up in rates by SBI followed others such as ICICI Bank, HDFC and Bank of Baroda. The quantum of the increase by SBI was lower than its peers, who marked up their rates by 75 to 100 basis points. ICICI Bank started charging 14% for fixed rate loans, while its floating rate was pegged at 12%.State Bank charged its best borrowers 12.75%, the highest since April 1999.

The continuous hike in interest rates saw an interruption somewhere between August and September, 2007. The country's largest home loan provider, ICICI Bank, reduced interest rates form 12% till now to 11.50%. This reduction was followed by the others like HDFC Bank, Bank of Baroda, IDBI and Allahabad Bank. The decision was a part of the differential pricing banks were introducing for home loans that qualify for priority sector.

Following this reduction, came the festive season when interest rates declined even further. Home loans became cheaper for SBI consumers by 0.50% to 1% depending on loan maturities and the amount of loan. ICICI Bank reduced interest rates on its floating home loans by 50 basis points to 11%. Bank of Baroda reduced the rate of interest between 25-50 basis points for the second time in less than two months. IDBI also cut the interest rate by 50 basis points to 10.5 % for the festive season. By the end of 2007 most of the banks were offering housing loans at reduced interest rates.

In the starting of this calendar year home loan rates came to a standstill. The home loan rates almost remained stable or rather declined by small amounts till March 2008 and subsequently home loan rates saw a brake when RBI made the announcements of the CRR increase in credit policy on April 29.

The decision of the central bank to raise the CRR from 7.5% to 8 % raised the home loan rates for HDFC and ICICI Bank by 75 basis points. State Bank of India (SBI) has also decided to raise interest rates on home loans by 50 basis points on all credit linked to prime lending rates (PLR).

Under the revised rate structure, the floating rate for new borrowers of HDFC was 11%, while the fixed rate was 14%. The fixed loan interest for ICICI home loans was increased to 14.75% - possibly the costliest in the sector.

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(Comments Posted : 2) Post Your Comments
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Do you need an urgent loan? (Posted: Dec 4, 2015)
2. The definition of repo rate is lacking. It is a short term rate but for a great piece on historical direction of Indian interest rates over the last few years you might have wanted define it properly so readers and potential borrowers know exactly what it means.
Sharat (Posted: Oct 9, 2008)
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