Kotak Bank offers FD rate benchmark for home loans

Kotak Mahindra Bank (KMB) has introduced the option of a novel benchmark for its floating rate home loans "" its one-year fixed deposit rate. The banking industry standard is to peg home loan rates to the prime lending rate (PLR).

KMB's PLR currently stands at 9.5 per cent, while its floating home loan rate is pegged at 250 basis points below it at 7 per cent. The bank's one-year FD interest rate is 5 per cent, while the benchmark floater home loan will be pegged 200 basis points above this "" or again, at 7 per cent now.

The bank has also introduced a semi-floating rate home loan, which allows for the interest rate to be reset every three years.

With interest rates turning volatile and consumers confused as to where rates are headed, Kotak Mahindra Bank has addressed the current needs of its customers by launching these two innovative products.

Most banks benchmark floating interest rates on their respective prime lending rate. Kotak Mahindra Bank is the first to set a new trend by pegging floating rate loans at 200 basis points over its one-year fixed deposit. The bank's one-year fixed deposit (FD) rate stands at 5 per cent.

"We have devised the new benchmark as customers feel that banks can arbitrarily increase the PLR, but not necessarily the fixed deposit rate," Pankaj Desai, head retail assets, Kotak Mahindra Bank, told Business Standard on Tuesday.

Customers see FD rates as being more transparent and unlikely to change as much since any upward revision would signal that the bank's willingness to borrow funds at higher rates, he added.

The semi-floating home loan product "" Kotak Flexi Home Loan "" is priced at a 25 basis point premium over its existing floating interest rate of 7 per cent.

This means customers will need to pay an interest rate of 7.25 per cent fixed for a period of three years, which would be automatically be reset depending upon the bank's PLR at that point in time.

"Consumers today are in a dilemma on whether to opt for a floating rate of shift to a fixed rate product. As they cannot take a long-term view on interest rates, and do not wish to pay a premium of 75-100 basis points for fixed rate loans, our new product helps resolve the two issues," said Desai.

It takes care of the possible volatility in interest rates by fixing the rate for a period of three years. At the same time, as interest outgo tends to be the highest in the initial period of the home loan, the liability is fixed as home loan borrowers need not pay fixed rate costs, he added.

The 3-year loan product can be rolled over again for a subsequent three years, thereby giving customers flexibility and allowing for repayment of the loan up to 20 years and more, pointed out Sandeep Kotak, business head (home finance), Kotak Mahindra Bank. Kotak Mahindra Bank has seen high monthly growth on its home loan portfolio, which currently stands at Rs 200 crore.

In September 2004, the book is expected to grow by Rs 50 crore, against August's figure of Rs 30 crore.