The differential interest rates on the home loans has been encouraging the borrowers to transfer their loans from the private sector banks and housing finance companies to public sectors where the rate of interest is comparatively lower.

Giving an insight into the trend, a senior at IDBI Bank official said, "customers would do well to do a through cost-benefit analysis before they go in for balance transfer of their outstanding home loans from one bank to another. The reduction in equated monthly instalments should far outweigh the pre-payment penalty charges (imposed by the old bank) plus the processing fee (imposed by the new bank)."

PSBs have been thriving on the opportunity to expand their retail loan portfolios by accepting loan transfers from private competitors. Many of the banks have invited the home loan 'balance transfers' from the private sector banks and housing finance companies.

A senior official, Bank of Baroda, said, "Our chairman has clearly said that this is an opportunity for us and we are very active in taking over home loans. If it makes sense for the borrower to foreclose the loan with a private sector bank despite paying a penalty, then it indicates that there are reasons strong enough for them to do so."

The switches are encouraged by the wide gap in the interest rates on home loans offered by the PSBs in relation to the private sector banks and housing finance companies. While there some are PSBs, which are fast taking over the home loan assets from other banks, others do it only after adequate due diligence over the customer and finely assessing the asset quality before accepting the transfer.

Quoting a senior official at Corporation Bank, "Public sector bank home loan rates are very competitive. So, when customers who have taken loans from other financial intermediaries realise that there is a wide differential between the interest rate they are currently paying and what we are offering, they seek balance transfer. We grant this facility only after conducting our own due diligence on the customer."

Andhra Bank, which has been focusing on expanding its retail portfolio, derives a significant portion of its home loan portfolio from the loan asset takeovers. Anjaneya Prasad, General Manager, Andhra Bank, said, "It is not that we take over the loan of any customer who comes to us. We do make an independent assessment, check the title deeds of the property and carry out all due diligence. As our rate of interest is lower, the customer benefits."

With the lowering of the interest rates by PSBs, there has been a spurt of applications for loans transfers. Though the reduction in the lending rates represents a chance for the PSBs to expand their retail credit, the exposure also implies uncertainty and other credit risks. Considering the interest trend, a public sector bank official rightly pointed out, "If interest rates fall again, there is a possibility that the customer may shift his loan again. We do it (balance transfer), but only selectively."

State-run banks had cut the lending rates following a directive issued by the finance minister, asking banks to lower the lower interest rates in line with, industry demands and the falling cost of funds. Though the center sees a possibility for further rates cuts, bankers deny scope for drastic lowering in the lending rates. Currently, PNB has the lowest PLR of 11 percent.