Banks plan home loan breather

Public sector banks, which did not raise interest rates on home loans since January, are likely to pass on the benefit of lower capital requirement on loans up to Rs 20 lakh to customers.

These banks, except State Bank of India and Bank of Baroda, are likely to raise rates by a lower margin on these loans as they expect a 25-50 basis points gain from lower risk weight for capital allocation.

The increase in interest rates on loans above Rs 20 lakh are expected to be much sharper. Public sector banks are considering up to 50 basis points increase in interest on loans up to Rs 20 lakh and 100 basis points or more on loans above Rs 20 lakh.

The finance minister had told chairmen of public sector banks during a meeting on April 19 that banks which have already raised rates in the last two months, should not increase again and those who had not raised, the increase should be lower.

The RBI yesterday reduced the risk weight on home loans up to Rs 20 lakh to 50 per cent from 75 per cent for a year, which would free up one-third of the capital allocated for banks' loan portfolios of up to Rs 20 lakh.

The reduction would be reviewed based on default experience in home loan portfolios. Y V Reddy, governor, RBI, yesterday said banks should pass on the benefit of this reduction to customers.

According to U S Bhargava, chief general manager, Punjab National Bank, "We are considering raising rates home loan rates by one per cent but on loans upto Rs 20 lakh by 50 basis points only."

Public sector banks are likely to opt for a graded pricing of home loans depending on the loan amount. While, some banks such as Corporation Bank and Bank of India already charge higher for housing loans above Rs 20 lakh.

The country's largest lender, State Bank of India (SBI) and Bank of Baroda, had raised home loan rates by 50 basis points earlier this month.

While Bank of Baroda will not be lowering rates for small borrowers, SBI is yet to take a call. The bank may keep rates unchanged now and not raise rates for small borrowers next time around as the bank had spared home loans upto Rs 15 lakh in its January hike.