In order to revive the demand in the home loan segment, PSU banks are planning to charge interest rate of 9.25% or less on home loans up to Rs 30 lakh.

Although the government owned banks are already charging 9.25% for the first five years on loans between Rs 5 lakh and Rs 20 lakh but now they are going to extend the limit to Rs 30 lakh.

Under a special home loan scheme open till June 30, 2009, PSU banks are charging 8.5% for loans up to Rs 5 lakh and 9.25% for loans above Rs 5 lakh and below Rs 20 lakh.

However the banks are now planning to restructure their loan slabs and also extend the offer period.

For instance, Corporation Bank is planning to replace the two slabs of up to Rs 5 lakh and Rs 5-20 lakh with a single slab of up to Rs 30 lakh. "We are working on restructuring of slabs for home loans to bring down the lowest slab to Rs 30 lakh. We find that 75 % of the demand for home loans was in this segment," said JM Garg, Chairman and Managing Director of Corporation Bank.

He added that the interest rate will be limited to 9.25% or lower for the first five year of the loan tenure. "There is further room for interest rate cuts and our next asset liability committee is to take a call," said Mr Garg.

At the same time, IDBI Bank is also on the final stages of its discussions on restructuring of the slabs, said IDBI's chief financial officer RK Bansal.

On the other hand, there are other PSU banks like Canara bank that have already implemented the change.

The move has been initiated by the PSU banks to revive the ailing demand in the housing sector since September 2008. The third quarter of the fiscal reported a negligible growth in the home loan disbursement of the banks. However the demand improved in the March quarter for the lower-priced houses. This was witnessed due to special home loan schemes offered by the banks and developers lowering down the prices.

Demand for home loans below Rs 30 lakh rapidly rose in metropolitan cities as well as tier-I and tier-II cities during the last quarter of the previous fiscal. "While home loans in the sub-30 lakh category industry is seeing a higher growth of around 10-15%, the Rs 30 lakh plus category is showing a growth of 5-10%," said Kamlesh Rao, executive vice-president, Kotak Mahindra.

Currently most state run banks are charging interest in the range of 9.75-10% on home loans of Rs 30 lakh. So for after every 25 basis points reduction in this category, EMI on a 20 year loan would come down by nearly Rs 500. Therefore a rate cut to 9.25% or lower would make the monthly payment cheaper by Rs 1,500 or more.