State-owned banks, which have included free life insurance cover in their special home loan package, have mostly preferred to do business with their life insurance subsidiaries rather than state-owned Life Insurance Corporation of India.
On December 15, all state-owned banks announced a special home loan package that included free life insurance cover, in which premiums will be paid by the respective banks.
A tendering process was carried out by banks to choose life insurers, and LIC got orders from only eight banks, a source said. Total number of government-owned banks in the country is 27, including State Bank of India and its six associate banks.
When the package was announced, it was expected LIC would get maximum business from these banks, since both are owned by the state. LIC officials were not available for comment. While SBI owns 74 per cent in SBI Life Insurance Company, Canara Bank and Bank of India hold 51 per cent each in their respective companies. LIC has devised a scheme called Group Term Insurance Scheme for Special Home Loan Package that will be rolled out from March 1.
Premium pinches
Most public sector banks were of the view insurance premium is likely to result in loss for the bank. “It may happen the premium amount paid by the bank could eat up the profit earned by them in this special home loan scheme,” a banking industry official said.
Premiums paid by banks are likely to be Rs 2-3 for Rs 1,000 sum assured. Premium amount will depend on amount outstanding. In case a person defaults on the home loan, premiums will be charged on the amount outstanding plus interest.
“Banks would have made profit even if charging lower interest rates if the premium component was not there,” said an official at a state-owned bank. The interest rate bank charges for the special scheme is 8.5 per cent for loans up to Rs 5 lakh and 9.25 per cent for loans up to Rs 20 lakh. Duration of re-payment period is maximum 20 years for all tenures under this scheme.
Interest rates will be set for five years. After five years, borrower will have the option for going for a fixed rate or floating rate of interest. The special home loan package will be applicable for new loans that will be sanctioned up to June 30.
