The largest housing finance provider, Housing Development Finance Corporation (HDFC) has slashed its retail prime lending rate (RPLR) by 50 basis points to 14% with effect from March 25th.

This the second time in the past three months that the company has cut the benchmark lending rate. The company said that the move was possible as its cost of funds came down. "We are now seeing a reduction in the costs on a portfolio level and as in the past HDFC has ensured that the reduction in cost is passed on to existing customers by way of a reduction in RPLR," said Renu Sud Karnad, Joint Managing Director of HDFC.

The benefit of this rate would be passed on to all the existing floating rate customers over the period of next three months based on their respective reset dates. It would give a choice to borrowers who can either lower their EMIs or reduce the number of installments.

For a new borrower, the bank will continue to offer rates applicable on the special offer launched last month. The effective rate for loans up to Rs 30 lakh is 9.5% and for loans above Rs 30 lakh, the interest rate would be 10.5%.

"In the current environment, there is a time gap between the reduction in the marginal cost of funds and the portfolio cost. Marginal cost of borrowing had come down earlier this year, and the same was passed on to our new customers through our special limited period offer (rates beginning at 9.5%)," said Karnad.

The recent reduction in the policy rates by the RBI has created adequate liquidity in the banking system, which had a positive impact on the cost of funds, Karnad added.

Further she said, "We have over the past few months seen that the measures taken by the government, drop in interest rates, correction in property prices and developers introducing affordable housing have resulted in an increased interest from the first time house buyers."

The demand for housing loans during the last quarter has been low due the financial crisis that resulted in job losses and real estate facing a crunch. "February has been better, as we saw new enquiries. The combination of reduction in interest rate and cut by builders will revive demand," said Ms Karnad.

Meanwhile HDFC has also reduced the lending rate on existing loans to Non Resident Indians (NRI).