SBI to trigger a churn in home loans

3 Aug 2012, TNN

MUMBAI: With lenders continuing to offer special deals only to new home loan customers, the industry is set to see a churn in the portfolio as this is the only way a large number of existing borrowers will be able to take advantage of lower rates.

SBI’s move has changed the equilibrium that loan rates had settled down to after the April rate cut by the Reserve Bank of India. While other lenders realize that SBI rates are the most competitive, they are still undecided about reducing their benchmark rates. SBI’s existing borrowers can take advantage of the new rates only after paying a conversion fee, which is 1% of the outstanding loan.

Officials in other banks say that rates for existing borrowers cannot be brought down without revising their benchmark Base Rate or Prime Lending Rates (for housing finance companies), which are pegged to the overall cost of funds. For banks, the benchmark rate determines not just the home loan rates but every other floating rate, including working capital loans for corporates – the mainstay for many banks.

This means that their most likely response would be to revise the interest spread, which is the difference between the floating home loan rate and their benchmark rate. But this revision in spread will not benefit existing borrowers who will be shifted to new rates only if they pay a one-time charge.

The one-time conversion charge for existing borrowers and the processing fees for new borrowers are the only barrier to home loan portability since all pre-payment charges have been withdrawn for floating rate loans. However, an existing borrower stands to benefit even after paying the 1% conversion fee, SBI deputy managing director P Pradeep Kumar said while announcing the new rates.

“The Base Rate can be changed when there is a sharp drop in interest costs. In the current environment when inflation rate is high, it is difficult to reduce interest rate dramatically,” he added. SBI has also cut rates on deposits above 5 years by 25 basis points, but this is not enough to bring down costs.

According to Apnapaisa CEO Harsh Rungta, it does not matter at what stage of the home loan the borrower is in; if there is a better rate, it makes sense to shift. “Even now there are borrowers who have loans at 12.5%. They do not even need to make a calculation to decide whether to shift,” he said. Home loans are very close to the stage when the interest spread is as good as it gets, he adds.

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