Rate war in home loan market hots up

Rate war in home loan market hots up
Business Standard, December 9, 2009, Section II, Page 2

BS Reporter / Mumbai

ICICI, Kotak Mahindra announce fixed-cum-floating rate schemes.

The interest rate war in the home loan market shows no signs of abating with ICICI Bank and Kotak Mahindra Bank entering the fray with their fixed-cum-floating rate schemes.
ICICI bank has announced a scheme under which the rate will be fixed at 8.25 per cent for the first two years. After that, floating rates will apply. The rates apply to loans sanctioned between December 2009 and January 2010. To avail of the offer, borrowers have to ensure that the first disbursement takes place before the end of March 2010.

Similarly, Kotak Mahindra Bank, which announced its scheme today, has fixed the rate on home loans at 8.49 per cent for 30 months from the date of the disbursement of the loan.

Salaried borrowers can hope to get floating rates starting from 7.99 per cent depending on the loan amount. While the fixed-duration rate would be the same, irrespective of the loan amount, the floating rate would vary with the amount, the bank said in a statement.

ICICI Bank’s latest move comes after a quiet phase for the bank’s retail operations which saw its home loan portfolio shrink by over 21 per cent to Rs 49,300 crore at the end of September 2009 from Rs 62,475 crore a year ago. The country’s largest private sector lender has identified home loans as a focus area.

Bankers said there was ample liquidity in the system with banks parking around Rs 100,000 crore a day with the Reserve Bank of India through the reverse repo window, which is used to suck out excess liquidity from the system. The cost of short-term funds is also much lower than for long-term funds.

Besides, with credit growth only a shade above 10 per cent, banks are keen to lend, even if it is for the short term, to maximise returns as the reverse repo window earns 3.25 per cent while parking cash in liquid schemes of mutual funds gets them an annual return of 4.75 per cent.

While many banks, including ICICI Bank, are still averse to unsecured lending, they are pushing home loans as defaults are low.

Last week, the country’s largest mortgage financier, HDFC, abandoned its aversion to fixed-floating loan schemes. Under HDFC’s scheme, all home loan applications filed till the end of January will be eligible for the dual-rate offer, under which the interest rate will be 8.25 per cent up to March 31, 2012. Subsequently, the bank levy the applicable floating rate. At least a part of the disbursement has to take place before March 2012.