Thursday, February 08, 2007

PSU banks freeze home loan rates

If you were worried about mounting interest rates on the home loan you have taken or are planning to take, breathe easy — at least until March. Finance minister P Chidambaram on Monday asked public sector banks to hold in abeyance any decision that hits the monthly budget of the common man.

Public sector bank chiefs, who met the minister on Monday, immediately agreed and decided to freeze interest rates at the current level.

But here’s a caveat. The FM’s request included only public sector banks. Currently, 75% of the home loan market is lies with private sector banks and housing finance institutions which may not necessarily comply. The freeze on interest rates by public sector banks could, however, put pressure on them and force them to fall in line.

Over the past three years, interest rates have gone up on five occasions. From 7% in 2004, the rates had hit 10% by January 2007. Borrowers are now paying nearly 25% higher equated monthly instalments (EMIs).

Last week, the Reserve Bank of India (RBI), in its annual policy review, hiked the repo rate (the rate at which banks borrow funds from RBI) to 7.50%. This hike is expected to put pressure on banks to revise the rate at which they lend. Chidambaram’s remarks came in the backdrop of the concerns this hike raises.

While RBI has expressed concern on credit flow to real estate, Chidambaram said home loan had not been clubbed with the sensitive sectors where the central bank wants credit growth to be moderated. He pointed out that the provisioning requirement — resulting in setting aside of more funds for the sensitive loans — had not been changed.

In other segments like personal loans, credit card, commercial real estate and loans for buying shares and borrowing from non-banking finance companies, the provisioning norms have been increased from 1% to 2%.

1 comment:

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