Cost or convenience

While public sector banks offer cheaper home loan rates, private banks score on efficiency.

When the Reserve Bank of India (RBI) slashed key interest rates last month, home loan borrowers would have heaved a sigh of relief. In the last four years, interest rates have spiralled from around 7 per cent to over 13 per cent.

Translated in terms of equated monthly instalments (EMI), it means that a person who had taken a Rs 30 lakh home loan at 7 per cent for 15 years would have paid Rs 26,964 per month. If he takes the same amount at 13 per cent for the same tenure, the EMI would be Rs 37,957, a rise of over Rs 11,000 a month.

However, with the rising financial crisis and tightening of the credit market, the apex bank has cut key rates over the last one month. This implies that interest rates will fall further. At present, only a few banks, mostly the public sector banks (PSBs), have slashed their rates. State Bank of India brought down the home loan rate to 10 per cent for a 15-year period. Others like Punjab National Bank and Bank of Baroda have also cut rates.

On the contrary, ICICI Bank, the largest private sector bank, has kept its interest rate unchanged at 13 per cent for the same tenure. Even HDFC has kept its rates at 11.75 per cent. Obviously, there is a good 2-3 percentage point differential between the private sector and PSBs, which could mean a difference in EMI up to Rs 5,500.

So, that brings us to the key question: does it make sense to borrow from PSBs or private sector banks? Let's evaluate them across various parameters.

Eligibility vs interest rate: Bankers say the rate difference is also because the two compete on different turfs for business. PSBs keep the rate lower, but the eligibility norms are stringent. Private banks and housing finance companies (HFCs), on the other hand, compete on eligibility.

For instance, the interest rate of a home loan from Indiabulls is at 17.5 per cent. “But the eligibility norms are much more lenient,” said Vinod Prajapati, director, Money Point, a direct selling agent (DSA), who also runs an online advisory website, easyfinance.in.

Nationalised banks look at how leveraged the borrower is and see his Credit Information Bureau of India (Cibil) report. This report gives details of all the customers’ loans, number of credit cards, etc. “Multiple credit cards or consistent outstanding amount on credit card can lead to rejection of the loan,” says a banker.

Service: This is one of the major reasons for borrowers opting for private lending institutions. From the process of applying for loan to the sanctioning, private banks or HFCs score over their nationalised counterparts. Private institutions offer the convenience, where a person can avail himself of the loan sitting at home. Getting a loan from a PSB requires regular visits to the bank and, at times, queuing up to meet the official concerned.

Direct selling agents say that the process from application to disbursement in private sector players takes about 10 days. PSBs take more than twice that time. “In most of the government-owned banks, the branch has to send documents to the regional headquarters for approval,” says Prajapati.

Another area that consumes time with public sector banks is the evaluation process. In case of private lenders, most of the process is outsourced. PSBs send their own staff for evaluation of property and verifying the customer's disclosed asset.

Margin: Most of the public sector banks also have a lower margin of funding. At best, they provide loans up to 80 per cent of the property value. DSAs say that most of these banks in reality do not fund beyond the property value. Public sector banks work with the belief that if the person has higher equity in the house, the chance of default goes down. Many PSBs do not take the agreement value into consideration. In the current market situation, where property prices are falling, public sector lenders do their valuations independently.

Rate cut: Whenever there is a reduction in the interest rate, public sector banks are the first to lower their rates. Also, private companies have different rates for existing borrowers and new customers. All the above stated rates are card rates that apply only to new customers. Existing borrowers are charged 25-50 basis point higher interest rates. Most of the PSBs do not differentiate. Hence many current borrowers are also looking at transferring their loans to public sector banks. However, if you are borrowing over Rs 30 lakh, public sector banks typically price their loans 50-75 basis points higher.
 

EMIs: PRIVATE SECTOR VS PUBLIC SECTOR BANKS
EMI per lakh (Rs)	5-years		10-years		15-years		20-years
	Fixed	Floating	Fixed	Floating	Fixed	Floating	Fixed	Floating
SBI	2,224	2,112	1,435	1,322	NA	1,075	NA	982
Bank of Baroda	2,211	2,161	1,434	1,377	1,216	1,152	1,136	1,049
HDFC	2,327	2,212	1,553	1,420	1,332	1,184	1,244	1,084
ICICI Bank	2,458	2,275	1,706	1,493	1,504	1,265	1,429	1,172
The home loan rates are indicative rates, which may change according to the credit profile of the customer

Switching loans: Due to the interest rate differential, many borrowers, who have an existing loan, are enquiring about shifting loans, also called balance transfer, from private to public sector banks. But public sector lenders are more stringent and conservative to lend to existing borrowers of another company. Also, the borrower has to bear the cost of processing charges on the new loan and pre-payment penalties on the existing loan.

Though private banks charge higher interest rates, public sector banks cannot match their service levels yet. If your loan component is less than 75-80 per cent, it may make sense to try a public sector bank. In the end, it is up to the borrower to choose between convenience and cost. After all, there is no such thing as a perfect lender.