The ongoing reduction in lending rates could lead to increased competition and balance transfers in the highly competitive housing loan market, especially in the prime salaried segment, according to credit rating agency ICRA.
The agency observed that while the lower rates are applicable only for new loans and loans linked to the marginal cost of funds-based lending rate (MCLR), to retain existing borrowers they are usually given the option to shift to a lower interest rate by paying a fee which could lead to dilution in yields for the lenders. However, incremental lending yields for lenders could decline and spreads could shrink from current levels. Loans linked to the MCLR for banks were less than 15 per cent of the overall home loan book.
Following State Bank of India’s recent announcement of reduction in lending rates for home loans by 50 basis points to 8.60 per cent (for floating rate loans), various lenders followed suit, effectively setting off a price war in the ₹13 lakh crore home loan market. Key lenders that together account for over 65 per cent of the home loan market, now offer interest rates in the range of 8.5-8.7 per cent after the reduction, compared with their earlier rates of 9.1-9.3 per cent, said ICRA.
ICRA expects the impact on spreads of housing finance companies (HFCs) to be much higher if they were to attempt to match the rates offered by banks, given the latter’s lower cost of funds and excess liquidity post-demonetisation. As 60-65 per cent of the borrowings by HFCs are at fixed rates of interest, and the assets are largely floating, spreads could shrink over the medium term.