INDIA BUSINESS WORLD SEPTEMBER (16^th - 30^th) 2007
The Month that was ...

HDFC ADDS TO FESTIVAL CHEER WITH 10.5% HOME LOAN FLOATER

THE country's largest housing finance company, HDFC has announced a special interest rate of 10.50% for customers availing home loans at floating rate of interest. The offer will be applicable to all loans disbursed on or before October 31. This is 75 basis points lower than HDFC's regular rates and 50 basis points lower than the rates charged under the monsoon scheme launched last quarter.

The new scheme, however, does not provide relief to customers who are paying interest on floating rate loans linked to the prime lending rate (PLR, presently 14%). The institution has decided not to change its PLR, the benchmark for all floating rates. HDFC sources said the PLR could be lowered if the central bank reduces interest rates in its forthcoming monetary policy on October 30.

Commenting on the new rates, HDFC executive director Renu Sud Karnad said, "Our lending rates are a function of our cost of funds, and we have seen a reduction in our cost of funds. Historically, we have maintained a pre-determined spread and have always believed in passing the benefits to the customers. The special offer is an extension of the same philosophy."

Sources said HDFC has chosen to announce a time-bound scheme instead of revising its benchmark rates as it is not clear whether the surplus liquidity will be sustained. With a surge in foreign inflows, there is a fear the central bank may once again take steps to tighten liquidity. The reduction in lending rates considerably widens the difference between fixed and floating rate loans.

For borrowers looking at fixed rate loans, the interest rate is 13.25%. The 275 basis points difference is a disincentive for borrowers. Sources said the widening of the gap between fixed and floating rates was reflective of the uncertainty in the market with regard to interest rates.

Every 25-basis point reduction in interest rates brings down the EMI by Rs 171 per month on a 20-year loan for Rs 10 lakh. During the first quarter ended June 30, HDFC has seen a healthy growth in its home loans business with loan approvals at Rs 7,713 crore against Rs 5,998 crore in the corresponding period last year, representing a growth of 29%, and loan disbursements at Rs 5,645 crore against Rs 4,386 crore over the corresponding period last year, representing an increase of 29%.

In the second quarter too, the trends are that growth will be over 25%.