FM looks at home loan rates

Appeals for lower rates for loans up to Rs 20 lakh.

Finance Minister P Chidambaram has indicated that interest rates on housing loans of up to Rs 20 lakh may be lowered as risk rates on such loans are at the bare minimum.

"I shall certainly bear in mind that there is public demand that interest rates for those who borrow housing loans up to Rs 20 lakh must be lowered," the finance minister said during his post-Budget interaction with the Associated Chamber of Commerce and Industry (Assocham).

Chidambaram said 80 per cent of the home loans raised are well within the range of Rs 20 lakh and defaults among such borrowers are extremely low.

The finance minister's statement is significant given that major public sector banks "� State Bank of India, Punjab National Bank and Canara Bank "� cut their benchmark prime lending rates 50 basis points last month at his request.

Chidambaram had appealed for lower interest rates to boost consumption expenditure.

All banks wanted to wait till the first quarter of 2008-09 to take a call on reducing interest rates.

The finance minister, however, said it was for the banks and Reserve Bank of India (RBI) to take a call on lowering home loan rates, since lower rates could put pressure on inflationary targets.

"The RBI governor can never please everyone. It is his judgement call what the interest rates should be in order to contain inflation and promote growth," Chidambaram said.

Banks, however, had already started pricing loans up to Rs 20 lakh at 25 to 50 basis points less than loans above Rs 20 lakh. The differential pricing followed the RBI designating loans up to Rs 20 lakh priority sector lending and reducing the risk weight for capital allocation to 50 basis points from 75 basis points.

Banks had raised their overall lending rates by up to 400 basis points in over a year up to May 2007 following increases in reserve requirements by the central bank, which led to a sharp fall in loan growth for home, car, two-wheeler and commercial vehicle purchases.

The year-on-year growth in home loans towards the end of November 2007 had dropped to 15 per cent from 33 per cent a year ago. For commercial vehicles, loan growth dropped to 36 per cent from 81 per cent a year earlier.

Significantly, private sector banks, including ICICI Bank, the country's second largest bank, have not responded to the rate cuts by their public sector competitors.