Public sector banks today announced that home loans up to Rs5 lakh would be given at a maximum interest rate of 8.5 per cent, while those between Rs5-20 lakh would be offered at 9.25 per cent.

Besides, the banks will not charge any processing fees and pre-payment charges for loans up to Rs20 lakh, and would also provide free insurance cover, the Indian Banks Association (IBA) said. If the borrower expires over the span of the loan, insurance companies would settle the loan and the title of the property would pass on to borrower's the family members.

The policy seemed to be aimed at providing relief to the small borrower mainly from tier II and tier III cities.

In mega-metro like Mumbai and Delhi, which have witnessed a sharp rise in real estate and housing costs, the rate cuts have have not been greeted with much enthusiasm.
 
While this may bring some relief to consumers, the realty sector has expressed deep unhappiness over this measure terming it as 'grossly inadequate'

Presenting a reality check, Assocham president Sajjan Jindal said making home loans up to Rs5 lakh available at 8.5 per cent and between Rs5 lakh and Rs20 lakh at an interest rate of 9.25 per cent did not make sense as properties are hardly available at this cost, even in Tier-II and Tier-III cities, let alone metros and large townships.

Jindal called on the government to peg the interest rate on housing loans up to Rs30 lakh at 6 per cent and at 8.5 per cent for loans above this amount.

According to Assocham, this move will create the required growth momentum in real estate, construction, cement, steel, electrical and heavy engineering sectors.

CII welcomed the interest-rate cut. The CII director Chandrajit Banerjee said that this comes at the right time and would provide the much needed support to the two sectors. The MSME sector has been one of the worst hit as a result of the credit crisis and this would help ease the cost of credit burden on these companies. However access to easy credit still remains an issue for MSMEs.
 
CII's Banerjee  went on to say that low-cost housing has a tremendous multiplier effect and hence the decision of the PSU Banks to cut rates for the sector implies that overall demand would get a boost.

This would naturally help the real estate sector as demand picks up, and this is really needed since the sector has been reeling under the impact of the economic slowdown.

However, Chetan D. Narain president and CEO of Mumbai-based  real estate firm, Narains Corp, has a firm view that one should view - distinguish between the demand for the real estate market from the demand for the home loan market.

Says Narain, ''It should be developers who reduce their margin and bring down prices to realistic levels to give the market a demand push. Bringing down home loan rates is not the only solution to revive the realty market in the country, as it will only give the buyer some ability to leverage his income and cash flows.''

Will there be a shift in the loan portfolios?
 
Recently, ICICI Bank had announced reduction in its home loan rate from 13 per cent to 11.5 per cent for loans of up to Rs20 lakh.

The new rate was applicable for new customers only. As there was no change in the bank's prime lending rate, the benefit of the 1.5 percentage point cut in the loan rate will not be passed on to the existing customers.

This rate reduction has come on heels of ICICI Bank raising its home loan rate by 1.5 per cent about a month back, that too at a time when public sector banks had started reducing their rates.
 
If private sector banks are unable to match the reduced rates, there may be a shift in clients from the private sector to the public sector.