SBI to spare existing Home Loan takers

APRIL 7, 2007: The country’s largest bank, State Bank of India (SBI), has decided not to raise interest rates for a large number of existing home and education loan takers. While the move may be partly influenced by the earlier finance ministry advice that banks should not rush through with rate hikes, the bank may also be driven by the concern that a bigger loan burden could trigger defaults.

The asset liability committee (Alco) of SBI, which met on late Thursday evening, has recommended to the bank board that the benchmark prime lending rate (PLR) may be hiked by 50-75 basis points. Currently, the bank’s PLR stands at 12.25%.

The committee has also viewed that lending rates should be raised for all new home and education loan takers, but there should be no rate hike for loans below Rs 15 lakh and Rs 4 lakh, respectively. Most of the home and education loans are below these levels.

The move reflects that interest rates may be reaching a threshold point, beyond which households may find it difficult to manage a higher monthly outgo. "As far as new customers are considered, they can take a call on whether they would like to borrow at high rates. But the existing ones will find the going tough, and this could give rise to loan delinquencies," said an analyst.

Alco, however, has not suggested any increase in deposit rates. The executive committee of SBI’s board will meet on Saturday to take a final decision on the lending rates. Currently, SBI charges a floating interest rate of 10.25% for home loans up to five years and 10.75% for loans up to 20 years. The fixed-rate home loan is pegged at 12.25%. However, it is subject to a reset clause every two years.

In the last one year, home loan rates have risen by as much as 2-3 percentage points. In case of HDFC, floating rates have increased from 9% in May 2006 to 11.25% now. ICICI Bank has raised its floating home loan rates to 12%.

Source: Economic Times