SBI CUTS HOME LOAN RATES

DIFFERENTIAL RATES CAN LEAD TO SUBPRIME-LIKE CRISIS: PAREKH

The State Bank of India reduced its home loan rates further by announcing a three-month-long "SBI My Home Campaign", starting from Saturday. In SBI's home loan scheme, interest rate for the first year is 8%, and for the next two years is 8.5% to 9% depending on size of the loan. It is linked with benchmark lending rates.

However, the chairman of the country's biggest home loan lender HDFC, Deepak Parekh criticized the lending institutions like SBI, which gives home loan at differential rates — low rates for the earlier period and raising it later. Parekh warned that such artificial lower rates could lead to a subprime-like crisis, which happened in US housing market.

‘‘We are seeing some variations of teaser type housing loans being offered. The lure of low interest rate at the start of taking a housing loan is enticing. But are customers being made aware of future implications of this?" he asked.

SBI has effected the steepest reduction in interest rate on home loan between Rs 30 lakh and Rs 50 lakh. However, the interest rate will remain same for the first year at 8%, it will be brought down to 8.5% from 9.5% during the second and third year. For the period beyond third year, the floating rate on the loan has been cut by 1.25 percentage points. Earlier, the rate was pegged at 1.5 percentage points below PLR, which has now been increased to 2.75 percentage point below the bench mark rate. So the effective home loan rate will become lower. If the present condition remains the same and the bank does not change PLR, the new rate will be 9% as against 10.25% earlier.

Parekh noted that main reason of the US housing loan crisis was such kind of loans — that offered artificially low interest rates in the initial years but once the rate normalised later, many found themselves unable to service the loan. "These are the lessons one should learn from," he said, pointing out that the same disturbing trend being seen in India where some variation of teaser type housing loans are being offered in the market.

However, in its latest offerings, the interest rates on home loan offered by SBI will be lower that that of HDFC for the entire period of repayment, Even for the later half, the rate will be lower than HDFC. In fact, this aggressive stance of SBI will force the other banks to follow suit soon.

State Bank of India said the market response to its special initiatives on home loans has been encouraging, which is evident from the fact that the bank's net lending to individual home loan borrowers has increased by Rs 10,076 crore during the year ending May 2009. Besides this, it is also not taking any processing fees.

In case of home loan up to Rs 30 lakh, the benefit for the first year will remain the same with interest rate at 8%. But for the next two years, the interest rate has been cut by 0.5 percentage points to 8.5% from 9%. The fall in the interest rates after that will be 75 basis points

Courtesy:- TOI dt:- 08-08-09