INDIA BUSINESS WORLD - APRIL 2006
THE MONTH THAT WAS

INTEREST RATES ON HOME LOANS SET TO RISE 25-50 BPS

RETAIL customers, especially home loan customers taking loans above Rs 20 lakh, may have to pay marginally higher interest rates. A similar hike may also be seen on loans to commercial real estate developers. Initial estimates by bankers suggest that the increase in rate for home loans and other segments would be around 25-50 basis points.

Banks will have to charge higher interest rates on some categories of retail loans as RBI has hiked general provisioning for standard assets in specific sectors like personal loans, loans and advances qualifying as capital market exposures, residential home loans above Rs 20 lakh and commercial real estate loans from 0.4% to 1%. RBI also raised the risk weightage on commercial real estate from 125% to 150%.

Even as the provisioning requirement has gone up around 60 basis points, the hike in interest rates may be lower as the impact would be felt for the first year. It would also depend on how well capitalised the banks are as the rise in provisioning and risk weightage would affect the return on equity for banks.

Weaker banks and banks with a large portfolio of these loans are likely to be more affected and may hike rates first. However, some banks have already made a standard provision of around 1%. According to Neeraj Swaroop, CEO, Standard Chartered Bank (India region),”There is likely to be an impact and there would be repricing on some of the loans. The increase in provisioning would impact banks' return on equity. However, the impact would be in the short-term.”

AK Khandelwal, CMD, Bank of Baroda, adds that banks will have to reprice their portfolios. He also said that banks may either slow down or have to budget for the higher risk.

 Banks have seen a sharp rise in loans to the commercial real estate sector. Between April to January '06, loans to builders shot up 84% (increasing by Rs
11,225 crore), the highest credit growth recorded in any sector.

The average ticket size for a home loan is much lower than Rs 20 lakh. “Some products like personal loans are rate insensitive. Others which are finely priced like mortgages would see a revision in interest rates,” says Romesh Sobti, country representative, ABN Amro (India).