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STATE Bank of India has launched two special home loan schemes that assure low interest rates in the first three years, upping the ante for its rivals in the mortgage market, which has turned bullish following a pickup in home sales in May.

HDFC has said it will take a view after the Budget, which is only days away. ICICI Bank said it has reduced interest rates in line with the movement of systemic rates and deposit costs since December `08. “We believe that the home loan segment has robust potential and we would continue to focus on this segment,” said an ICICI Bank spokesperson. LIC Housing Finance—the second-largest mortgage finance company—has also reduced home loans for existing borrowers by 50 basis points.

The intensity of the competition between SBI and HDFC is evident from claims and counter-claims from both sides on the superiority of their product. “Even if the borrower gets a better deal for the first three years, his payment over the remaining tenure of the loan will be lower under an HDFC loan,” said HDFC joint MD Renu Karnad. The institution’s chairman, Deepak Parekh, had recently announced a possibility of lending rates coming down if there is a decline in cost of funds.

According to Ms Karnad, there has been a remarkable pickup in home sales. “We are seeing this because of a real reduction in property prices. Builders like Unitech and Lodha have brought down rates in Delhi and Mumbai and are seeing growth in sales.” She added that the pickup in sales was so sturdy that prices have started picking up again—a perception echoed by SBI. “There is a definite pickup in home purchases partly driven by a fall in cost of loans and real fall in property prices. There are pockets where the resurgence is so good that property prices have started picking up; it has come a full circle quickly,” said an SBI official who did not wish to be named.

The official said rates have bottomed out and there is a possibility that they may go up marginally in the medium term. The official added that the bank has lent up to Rs 7,171 crore till the end of May `09 under the special scheme that offers loans at 8% for the first year. This is a sizeable number considering that disbursements during the whole of FY09 were Rs 9,372 crore. SBI has a home loan portfolio of over Rs 56,000 crore.

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