The special home loan package that was announced by the public sector banks for home loans up to Rs 5 lakh and loans between Rs 5 lakh and Rs 20 lakh has not got the expected response. The banks so far have disbursed Rs 1,550 crore under the scheme that was announced nearly two months back.

The public sector banks (PSBs) have cleared only 28,000 proposals. As per the industry bodies and the government, Punjab National Bank (PNB) has cleared 35 loan proposals with a disbursed amount of Rs 1.70 crore. On the other hand, State Bank of India (SBI) have approved the loan applications for 6,500 applicants.

Under the scheme, home loan up to Rs 5 lakh are offered at 8.5% for five years while loans between Rs 5 lakh and Rs 20 lakh are fixed at 9.25%. Further SBI and Central Bank of India slashed this rate down to 8%.

At the same time, the upfront payment under the scheme has also been low but still the response is not up to the mark. For loans up to Rs 5 lakh, borrowers have to bring 10% as upfront and in case of home loans between Rs 5lakh and Rs 20 lakh, 15% has to be submitted as upfront.

One reason for the low response is that the borrowers are expecting the real estate prices to fall and therefore they are postponing their purchase.

A senior executive at a public sector bank said, " Real estate firms are grappling with a sharp drop in demand and mounting debt repayment. They will have to reduce prices substantially to clear inventory. Once that happens, we may see some improvement in response."

"With the economic slowdown, many buyers are preferring to stick to rented accommodation instead of purchasing their own apartment," said another bank executive.

Meanwhile many banks are not even promoting home loans under this scheme because they are conscious about the pressure on their cost of funds. An analyst at a brokerage firm said that as funds are raised at high cost, PSU banks may see a pressure in the cost if they distribute the loans under the scheme at a higher pace.

The total cost of the loan would be high for the bank because banks not only have bear he cost of funds but also the cost of providing life insurance cover to the borrowers. Besides, there is no processing fee on the loan that ultimately adds up to the cost.

Moreover the banks are facing a slow demand on their normal home loans due to the expectation of further cut in the real estate prices.

As per the RBI data, the home loan demand has fallen to 8.8% as on December 19th, 2008 against 14.8% rise for the same period, a year ago.