Home loan rates head north

HDFC, ICICI, all set to raise rates by half-a-percentage point

February 15, 2007: Following a sudden increase in the share of cash that banks are obliged to park with the Reserve Bank of India (RBI) by 0.5 percentage points to 6 per cent, home loan rates are expected to increase by an equal 0.5 percentage points by this month-end.
While a large number of public sector banks have already increased their prime lending rates, which automatically increases the floating interest rates, two leading home financing institutions, HDFC and ICICI, which together have a 65 per cent market share, are also contemplating to increase home loan rates by 0.5 percentage point.

The second largest player, HDFC, which has a 25 per cent market share, is all set to increase its rate to 10 per cent from the current level of 9.5 per cent. “After the CRR hike, our margins, presently at around two per cent, are under pressure and we will raise the interest rate to maintain that spread,” said Deepak Parekh, HDFC's chairman.

This would be the second time within a month that HDFC would be raising its home loan rate. Earlier this month, it raised the rates by 0.5 percentage points after the RBI increased its overnight lending rate by 25 basis points (0.25 percentage points) in its monetary review. ICICI Bank had also raised home and car loan rates by one per centage point then. HDFC's floating home loan rates are set to touch 10 per cent.

ICICI, the largest player in the market with a 37 per cent market share, has already increased its rate by one-percentage point to 10.30 per cent. Sources in the bank said that it would increase the rate further by half-a-percentage point shortly.

The increase in the cash re serve ratio (CRR) has severely affected margins. “With RBI's clear intent to tighten money supply, the banks are feeling the heat on raising resources," said a top banker. “As inflation continues to maintain upward trend, there is a strong possibility that money supply may tighten further through different ways. This in effect means interest rates on homes are bound to move north as of now,” said another leading banker. Although state-controlled banks have decided not to increase their interest rates, experts feel that it would not affect the industry trend for couple of reasons.

First, public sector banks have a combined share of around 32 per cent in home loans of which the State Bank of India has around 12 per cent. Second, these banks are anyway reluctant to take aggressive exposures, industry insiders say.

Source: The Economic Times