Few takers for 'cheap' home loans

03 March 2009

The lowered interest rates for home loans announced recently by public sector banks have not led to the expected increase in demand. For instance, the State Bank of India's low-interest home loan scheme, which was expected to shake the market, has in fact barely created a ripple.

Two months after lower interest rates were announced for home loans up to Rs20 lakh, the public sector banks have cleared only 28,000 proposals, involving Rs1,550 crore, through these special schemes.

India's second-largest public sector bank, the Punjab National Bank, has approved only 35 loan proposals, disbursing just Rs1.70 crore under the new scheme, according to data compiled by industry bodies and the government. State Bank of India has done rather better, clearing around 6,500 applications.

Analysts say this is because there is no clarity about how the borrower's 'equated monthly instalments' (EMI) would be affected; and this is a primary concern for home buyers. In fact the Reserve Bank has had to instruct SBI to ensure that customers borrowing under the bank's special scheme don't get a rude awakening on their EMIs.

The RBI has asked SBI to give some indication to its home-loan borrowers on the possible EMIs they would have to pay after one year, when the special fixed rate of eight per cent no longer applies.

Under the special loan package pushed by the government to boost real estate demand, public sector banks were more or less ordered to freeze interest rates on home loans up to Rs5 lakh at 8.5 per cent for five years. For loans between Rs5 lakh and Rs20 lakh, the rate has been frozen at 9.25 per cent.