Following the announcement of fiscal and monetary measures by the government and RBI, banks have started cutting rates and now the government is pressing public sector banks to offer interest rates on home loans up to Rs 20 lakh at levels that prevailed before 2004.

The pre-2004 levels of rate would imply that housing loans are offered at interest rates of 7% to 8% against the current rate of 9.5% to 10%. However a banker from public sector bank said, "The price of such home loans may be capped at 10 percent.

Currently the cost of funds for banks is higher that the rate at which they will offer the loans as per the new scheme. The government is therefore planning to work out a deal that would compensate the lenders. Interest subsidy is taken as an option for the deal and also the government is looking at measures that would bridge the gap between the rate at which the loan is offered and the market rate. Refinancing from the Reserve Bank of India is considered for this purpose.

The government is also ready to bear the risk involved in interest rate movement during the course of time. An official from the finance ministry said, "We are looking at various options like interest subvention and cheaper liquidity support to banks to provide home loans at the pre-2004 rate of interest."

In fact Finance Secretary Arun Ramanathan is expected to meet the chiefs of public sector banks to discuss on matters regarding the same. The outline of the action is likely to be set by the next week.

Under the scheme, home loans up to Rs 5 lakh will be offered at a rate of around 7% while those above Rs 5 lakh and up to Rs 20 lakh will be granted at around 8%. The interest subsidy provision by the government will make the banks earn around 10% for the loans.

In the fiscal stimulus package announced On December 7th, the government informed that PSU banks will announce a package for home loans up to Rs 20 lakh. Even RBI decided on Saturday to include home loans of up to Rs20 lakh in so-called priority sector lending.

Presently banks and housing finance firms are charging between 12% and 14% for fixed-rate home loans and offering between 9.5% and 11.75% for floating rate home loans. But the latest measures announced by RBI has started easing the cost of funds for the banks following which they are expected to decline the interest rate further.